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How veteran VC Rahul Chowdhri spots 'stellar' needles in India's startup haystack
225 Plays1 year ago
As one of India’s earliest venture capitalists, Rahul's journey spans from Flipkart's early days to backing successful ventures like Simplilearn, BigBasket, and Livspace, and eventually founding Stellaris. In our conversation, he shares insights on the importance of listening to both customers and founders, his approaches to identifying promising startups in a crowded market and seizing opportunities in consumer products, edtech, and gaming sectors. Rahul also discusses the key traits he looks for in founders, the changing landscape for traditional businesses, and how investing during tough times can lead to resilient ventures.
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Read more about Stellaris Venture Partners:-
1.In good times or bad, Stellaris Venture Partners has a steady startup investment strategy
3.Early Partners of Fearless Founders With Audacious Goals
5.We do not suffer from FOMO: Stellaris Venture Partners
6.Stellaris Venture Partners' chosen path: Make contrarian bets, but with deep conviction
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Transcript
Introduction to Rahul and Stellaris Venture Partners
00:00:00
Speaker
Hi, my name is Rahul. I am part of a fund called Stellaris Venture Partners. We are an early stage fund based out of Bangalore. I've been investing for the last 17 years, been an operator before that. I'm very happy to meet everybody here and looking forward to it.
00:00:27
Speaker
If you want to understand the evolution of the VC ecosystem in India, then there is no one better than Rahul Chaudhry to understand it from. Rahul was one of the earliest venture capitalists in India. In fact, Flipkart was pitched to him and it was still an online bookseller.
00:00:42
Speaker
He was among the first few partners at Helion Ventures, one of India's earliest VC firms. After spending close to nine years at Helion, investing in some category-defining companies like Simply Learn, BigBasket, and LiveSpace, Rahul started Stellaris Venture Partners, which today is one of the most respected Indian venture capital firms.
Stellaris Fund and Focus Areas
00:01:02
Speaker
Stellaris has raised about $300 million to invest in disruptive startups, and Rahul's personal area of investment focus is in consumer products, edtech, and gaming.
00:01:12
Speaker
In this freewheeling and candid conversation with your host Akshay Dutt, Rahul talks about his learnings across his 17-year journey as an investor. Stay tuned for this amazing episode of the Founder Thesis Podcast.
00:01:35
Speaker
Thank you Raul. I want to kind of understand the journey of becoming a VC. First, tell me this, how would you rate yourself as a VC on a scale of 1 to 10? I would say still very early in learning what makes a good VC, so maybe around 7 or 10.
00:01:55
Speaker
I think you're being humble, right? You were one of the first VCs in India, if I'm not mistaken. If one was to count the first dozen VCs in India, you would be in that list for sure. But why do you say 7 or 10? What is your critical self-analysis, which makes you say that? I think this is one industry where every few years you need to reinvent yourself.
00:02:21
Speaker
There is no one formula that works. Industry around you change, founders change, your relevance in the industry change. And it's a success, finally, that matters. And after one success, you want to get to the second and the third. I think I've missed out on some great opportunities in the last 17 years I've been investing. I've been fortunate to be part of some good ones, or the fact that those founders allowed us to partner with them. But I wish I had more. And I wouldn't worry about whether I'll be relevant over the next five years.
00:02:51
Speaker
Well,
Learning from Mistakes in VC
00:02:52
Speaker
amazing. The opportunities you missed out on, was it, I mean, it could be just like chance, you know, I just happened to make a better choice or was it that you had a fundamental approach which proved wrong or, and then your approach changed after that once you realized like what went wrong that you missed those opportunities and how did that lead to a course connection?
00:03:18
Speaker
No, very important or interesting question I would say, I think in my early days of the career, as I look back, I feel I was evaluating wrong pieces. I was anchoring on a dimension that actually doesn't matter in long term. Give me examples, can you share some details? No, you may imagine a company like Flipkart. I was thinking how large is the book market. I didn't even figure it out. It's an e-commerce company which will start with books.
00:03:49
Speaker
So those are the kind of mistakes you end up making early in the career. And as you rightly said, we were one of the earlier, there are not too many past history to learn from. So these are all first principle-based thinking. But I think I have corrected that. One piece which I still feel is always an issue is our ability to imagine.
00:04:12
Speaker
I was able to imagine in few areas, so like a big basket or a live space or a mom or, but I think there are a lot of categories. I still fail to imagine how, where can this go? And in early stage, you know, it is founders imagination coupled with your imagination, which may work, may not work, but there are some dimension just, it is still a struggle for me. And other investors get it, right? I don't, and that is okay. I don't know how to,
00:04:41
Speaker
I can be even maybe incrementally better, but I don't know if I can be dramatically better over a period of time on that. I want to zoom in a bit. You said you were evaluating on the wrong dimension and one dimension being the category. What has become the new dimension on which you evaluate instead of just looking at the category? So again, one is to listen to customers and founders more.
00:05:05
Speaker
versus your own personal views. Sometimes our personal views do create, I would say, biases. So how do you balance your past learning with what founders say? And then putting yourself in founder's shoes to actually see, is it practically, business-wise, commercially, is it possible or not?
Evaluating Founders: Ambition and Execution
00:05:24
Speaker
And luckily, again, with 17 years of experience, there are a lot of past patterns to follow. Like when we did Mama Earth, it was a baby care product company. It was a single brand.
00:05:34
Speaker
Now, it's a six brand and a more broader personal care business. At that time, I don't think I had the imagination to figure out the six brands in five years. Today, if I see a new brand, while I may have a view on the size of that particular brand, but if I talk to the founder, at least I have more belief in their ability to launch multiple brands and become large as an example in a category.
00:06:03
Speaker
monetization sometimes used to be people start with commerce, we look at margins and commerce. But today you see companies who don't only do commerce, they do commerce and lending. So there is a margin expansion that happens when it's an adjacent category, when it's a revenue driver on an existing customer base. So those are the kind of things that I would say my dimension has improved.
00:06:25
Speaker
where I'm okay taking those, or I'm okay. And now, let's say I believe in commerce plus lending, but if I don't feel that it is possible in that particular business, at least I've evaluated on the right dimension, I must still reach a conclusion that doesn't make sense, because there is no particular lending in that particular business.
00:06:45
Speaker
Okay. So you're saying the ambition of the founder is something which plays a bigger role in your assessment plus probably the ability to execute. Exactly. It can't be one of the two because I can have ambition to become, I don't know, you know, big heads, but if I don't have the ability to do it, how will I become? So it's a mix of the two that matters. So in that sense, you know, what in our industry we call it don't invest in bleeding edge, invest in cutting edge.
00:07:18
Speaker
There is only so much of foolishness one can have. You can't have all the pieces sorted out on day one. But you need a good mix. I want to kind of understand your journey of reaching to where you are today. And as we discussed, you were one of the earliest VCs in India. Just tell me how that happened.
00:07:43
Speaker
So, actually as a person, I am not a very planned guy. I find that when you talk to youngsters today, their thought process around how they want to build a career. Most of my career has been very scientific driven.
00:07:56
Speaker
So I belong to a town called Kota in Rajasthan. Obviously, the city has become much more famous now because of multiple education institutes out there. Were your parents in education or some allied field? No, my father is an engineer. My mother is a doctor, so they were not from education industry. But coincidentally, both the Bonsals and Ellen, both those families used to also work in JK, which is my father used to work. So I had, in some sense, grew up.
00:08:27
Speaker
when some of these folks were coming around. So, I ended up studying at Bansalankar's classes, but again very early days around his dining table and all is how he used to study. Went to, did my engineering from Kanpur MBA from Calcutta.
00:08:41
Speaker
And my first job was at BCG in consulting, you know, and it was all just because everybody wanted to go to consulting also in consulting, so not too much thought was given. Best paying job. Really liked, sorry. Best paying job, I guess, at that time. Yes, yeah. So, I like consulting for multiple pieces. One is this, you get to see what is the CU's problem.
00:09:06
Speaker
At that age, at 24 years, it is a very, very different experience to care about what does a large conglomerate CEO, what problem do they want to solve. Also, you get to work in multiple industries. I really like that, but I thought it was too early in my career to advise a 40-year-old and a 45-year-old on how to run their business. I myself had no business experience, so I ended up joining a software company. Next seven years, I was an operator.
00:09:35
Speaker
in product management in three different software companies, two in the US, I2M, and then came back to India. It must have been very early days of product management, right? Even product management as a principle would have just started to get formed. Yeah. I was at the right time in that sense, got to learn in early days from some of the better folks in the US and then came to India, again, part of the product management team, mostly on the application software side.
00:10:04
Speaker
But I realized over those three, four rows, including consulting, that I'm not somebody who thrives in a large company. I liked environments that were smaller, more action-oriented, more doing on your own. So from Microsoft, it was just coincidental. Helion and several other funds had just gotten started.
00:10:28
Speaker
from outside venture look very glamorous to me. You sit on board of founders, you give them money and in some sense you seem to be in a controlling seat and it is a small setup. As you rightly said, product management itself was new and Helion at that time wanted to add that expertise to the investment team.
00:10:50
Speaker
So again, coincidental. I ended up joining Helion. I was not sure whether I'll stick around even there again. But I really liked investing.
00:11:00
Speaker
So stay nine years out there, multiple. What was the backstory of Helion very quickly? Who started? Is it started by Indian founder? Yeah, so the GPs, Ashish, Sanjeev, and Kamal, two of them had been successful entrepreneurs. Kamal was a seasoned consumer product guy and also an investor at Carlisle before these three came together to start Helion. It was one of the most premium venture funds.
00:11:29
Speaker
amazing platform lot that I learned out there. It was also early days in 2007 and 2008, you know, what tech companies had call centers to take orders. That's how larger tech or the broadband penetration used to be. So 2 million broadband users, 10 million internet users, that's what we were at.
00:11:50
Speaker
So not easy, but you know, the good part is there are only six, seven, eight, maybe venture funds. So everybody, every founder, you're going to meet, spend a lot of time, understand what they're doing and take your picking. So that was a good part. The bad part is we were all learning from our own mistakes. Yeah. So yeah, it happened. And then 2010, I think is then 11, 10, 11. And then the inflection point of smartphones happened.
00:12:16
Speaker
But I think in 2012, we had close to 100 million smartphones or 100 million internet users. And that's where the journey really, the scale really happened. Again, partnered with some very interesting businesses. As I said, Big Basket, Libspace, SimpliLand, Topper, ID Fresh, and so on. So I was lucky to see those journeys, and then 2016, and still I always got started, and three of us came out.
00:12:41
Speaker
What
Stellaris's Investment Strategy
00:12:42
Speaker
was the thesis at Helium? What kind of businesses? And it must have evolved. Very similar to what we do at Stellaris, which is early stage. So, seed and series A. So, either somebody with a business plan to somebody who's just pre-PMF, wanting to raise their first round of institutional capital. So, that is where we enter at Stellaris and that is similar to Helium. Also, mostly tech-enabled businesses or tech companies and mostly founders from India. So, yeah.
00:13:11
Speaker
I guess somebody with just a business plan would, that round of funding would be called pre-seed, right? Yeah. So you can call it pre-seed, but we do that quite actively at Stellaris. So we are very comfortable taking those bets. Okay. Obviously, we are, in some sense, there's a fund we every set or thesis-driven. So wherever we have existing thesis, and we find a great team, we are okay backing them at a business plan also.
00:13:38
Speaker
And as I said, we are okay backing companies who have just launched their product, who have just barely started the revenue.
00:13:45
Speaker
but generally we are the first institutional pool of capital that they raise money from. Okay, interesting. What was the reason for you to leave Hilliard? You were a general partner at Hilliard and just tell me a bit on how the VC organization chart works. There are a couple of roles that you will see and most venture fund titles might be different.
00:14:14
Speaker
There is a quote-unquote enamelist role, which is generally, I would say, it's not a long-term career track. It's a two to three-year role, mostly pre-MBA folks. People with one or two years of experience want to know how venture works. They're great in building networks, great in sourcing. But after two, three years, they might start their own companies, do their own MBAs, or do something else.
00:14:40
Speaker
So that's one broad role that you would see in a VC. Then there is this role which is more an associate or a VP role. And there the job is to be on a long-term career track. So you get involved not only in sourcing but also in full-fledged diligence. But you're still supporting somebody else.
00:15:01
Speaker
to lead a deal. And different forms might have different policies, but like in our case, an associate or a VP, while they're supporting somebody else, like a MD or a principal, they sit on boards with the board observer. So you are in some sort of shadow to the main board member. The next is that you need your own... Quick question. VP here is venture partner or vice president? Sorry, vice president. OK. OK.
00:15:28
Speaker
The next is a switch, which is you are the main person on the board, but maybe a partner is shadowing it. And again, different titles, but in our parlance, it is called principle, where you take the conviction to take a bet, or you build your conviction. But then on boards and all, you'll have somebody shadowing it as an observer. And then the next is where you take your own calls, you get your deal sponsored, and you are the only board member. You don't need anybody supporting the board.
00:15:58
Speaker
Right. So in terms of investment, the next level, what is that called? So again, different people have different items. Some people call it junior partners, some people call it MD, some people call it, may call it partner. But GP is slightly different role itself. See, GP is somebody who's doing a tenure commitment to the fund. GP is somebody who- And GP stands for generous partner. Whose brain is there, then LPs are investing.
00:16:24
Speaker
in their money. In some sense, the IC literally is what LPs think of them as a GPs with IC because they know that finally it is these five folks or three folks that we are backing for this fund. So it need not be that somebody who's a MD is also a GP. So there is a transition. You are also in that point of time, you are no longer
00:16:51
Speaker
there's no longer an employee kind of salary in some sense. You are a risk taker. You say I'm 10-year committed, I will do this. Then if there is money left after paying everybody's salary, you get it. If there's none, then you are okay taking that. So the economies are also slightly different. You have more profit share in that case because you are the one taking the risk. So that would be a jeep in the investment rule.
00:17:21
Speaker
Okay, okay. And just for our listeners, GP is general partner, LP is limited partner. LPs are investors, basically. Yeah, LPs are essentially investors in the fund. They are called limited partners because their main job is to invest, but they are not the ones taking investment decisions. GPs are the ones taking investment decisions. Right, right. But they are partners because they are stakeholders in the fund. Okay. And IC is the investment committee, which has the final... IC is the investment committee. Yes, no decision.
00:17:51
Speaker
Yeah, who work on investment decisions and see when you're running a venture firm, it is investment decisions are the most important ones, but there are a lot of other decisions. So like strategy, right? Some fund might decide, let's do series Bs. So there's a strategy difference.
00:18:07
Speaker
Hiring, very critical because we are not, you know, we are not a fund, fund doesn't hire like 100 people and doesn't add 10 new people every year. It's a small team. So, hiring is very important decisions, is decision to be taken. How large is the next one going to be? So, those are all fund level decision. Beyond that, I see investment decision that you will see happen.
00:18:30
Speaker
And typically GPs are also the ones who go out and raise money. Like that needs to be one of the scales to be a GP. Yes, exactly. So you need to, it is like any other sales job. You need to convince somebody to give you money, believe in you for the next 10 years.
00:18:48
Speaker
And people who make those allocation calls, if they are global, they have an opportunity to invest in a fund in China, in Israel, in US, in India, in Japan. So you have to justify why you are the best opportunity for them to invest.
00:19:06
Speaker
Okay, interesting. So at Helion, were you like at an MD level or a GP or what was? You can call us, we were title as partner, but it was more what I was describing as MD. Okay, okay, okay. And so you wanted to have your own fund, that's the reason why you left or was there like a directionally or a different thesis or something? Yeah, so slight difference in how we wanted to build.
00:19:35
Speaker
And as I said, Elon is an amazing platform. But we had certain thoughts on what we wanted to build as a franchise. And we thought, let's do it on our own. What were those things that you wanted to do? What was the vision you started it with? Yeah, so our view was that, obviously, at an overall level, our view is to build India's premium top tier venture fund, or early stage in India.
00:20:02
Speaker
That is a vision. Now how you do it? Different people matter, different philosophies. But when we started, we felt that just in terms of focus, we only wanted to do one thing. So we didn't want to do multi-stage, we didn't want to do multi-geography, we didn't want to do multi- or non-tech, which some venture funds used to do at that time. So we said, let's do only one thing and do it well.
00:20:30
Speaker
Second is how we service the entrepreneurs. So there is a certain philosophy in how Stellaris is, and it's a culture that starts internally and then get projected externally also. Internally, it is a lot about giving everybody a voice, giving everybody clarity on their careers.
00:21:01
Speaker
and respecting each other's views. So that is one thing that we have tried to do from day one, and it is easy to put that in a piece of paper, but very hard to execute on a daily basis. I will just struggle to give you exact example, but the best way is to talk to either ex-employees or employees on how we function as a fund.
00:21:28
Speaker
Also, how to build stability of partnership. I think one of the things that you wanted to address is that this franchise better last beyond the three of us. So there's a lot of thought given on partnership structure. We've all gone through our ups and downs, but I would say for the last eight years, there is a lot more confidence and stability of the partnership and hopefully, ability to add new partners.
00:21:53
Speaker
And see for any new investor in the team, if they are great investors, they will obviously ask a question, why not start my own fund? And ideal case for us, if you are one of those folks, then this is your own fund over a period of time. So why do anything else? And that is how we deal with founders also. In some sense, it is about respecting their understanding of the business. We actually feel we don't know anything about the business.
00:22:20
Speaker
They can try to scratch the surface. But the best we can do is help them share our experience from past and see if it applies to their current business. And second is ask right questions. And then because of some past experiences, I can ask relevant questions. But answers have to be generated by them. They have to feel that they finally arrived at the decision.
00:22:45
Speaker
And it is theirs too. If it fails, it fails. If it succeeds, it's theirs only. So I think that is very important when you're dealing with founders. And it requires some patience. As an operator in early days, I always used to think, why can't do this better? Why is somebody not realizing it? But everybody has their flaws and strengths. So I have my own flaws. So realizing that finally, if I'm bagging a founder, I better back them 100%.
00:23:15
Speaker
And the third one is how we structure internally and allows us to win the deals externally. And that is where, you know, while we are a fund, we are a journalist fund, we do everything within tech. But as individuals, we have tried to build very deep expertise in our own areas.
00:23:33
Speaker
So if somebody does SaaS, they only do SaaS. If somebody is doing FinTech, they only do FinTech and so on. If I get to see a FinTech deal from my own network, I will not work on that. I know I'll make a fool of myself trying to invest compared to somebody else in our team who spent 10 years investing. And that is something that gets projected when we deal with new founders. They realize our expertise is a big help to them. They also feel they're talking to right set of fools.
00:24:03
Speaker
So those are some of the structural pieces how we have made the fund different. In the early days, we also got support from some of the most well-known founders in the country by investing in us. And it had multiple strategic advantages. Give me some things. So we have people like founders of big basket, founders of big space, founders of India Mart.
00:24:26
Speaker
founders of Capillary, founders of Uran, several CXOs of Flipkart, Mitra, CEO, and so on. So these are super engines. By getting them as investors, it allowed us one access to their own deal. But if you think of any new founder today, they are coming from one of these late stage startups. So it also allows us to get a peek into their past journeys in those large companies.
00:24:55
Speaker
Because when we are investing in early stage, most of our belief and pieces is investing behind that founder or their ability to build a large company. So that better, we should have done enough work on that front. So some of these pieces helped us early on. This group still stays very important to us, even in the second fund that we're investing on. What is the total amount that you have raised so far?
00:25:23
Speaker
like the amount available to deploy. Yeah, so today between the two funds, we have about over $300 million to invest. The second fund, which is what we're investing out of, that is $225 million. Okay, so the second one is like a 3x, 4x jump over the first one. In the first one, you would have proved out, like then the credibility building proved out the thesis.
00:25:49
Speaker
Yeah, yeah, yeah. Yes. And we also build a team. So in the first part, it was just three of us who were the main folks sponsoring these. Now we have six people, including three of us who sponsored it. So there is more capacity within the fund to do more deals. And clearly between 17 and 23 or 24 now, seven years, the venture landscape is also
00:26:12
Speaker
broadened a lot. And then we used to see, I think, about 800, 900 deals a year in 2017. We see more than 3,500 deals a year last year is what we saw. So yeah, also with larger team more coverage, as in in 2017, we used to see 55% of deals that other investors did. Today we see 90% of the deals that everybody does in the world.
00:26:38
Speaker
So it allows us to see almost everybody who's raising from quality investors. Okay. Okay. You must be getting like thousands of deals every month. So what do you mean when you say you saw three and a half thousand deals last year?
00:26:56
Speaker
So that includes everything. That includes the inbound and outbound. So outbound deals a month is what we get to see. Inbound is new deals. I think there are a lot of passes that we go. Right. Because the early stage means there is a lot of noise in that, right? Exactly. So hours is a needle in haystack business. Right. Exactly. So this 300 is what you receive inbound after some screening filter or total is 300 that you receive.
00:27:25
Speaker
So I would say these are these that get logged into our CRM. Okay. So somebody has somebody would have seen it, read it, and then said, let me log into our CRM. Okay. Okay. Now we might say no to a lot of them over an email itself without an interaction. We might have one call. If somebody finds it interesting, then we have two calls and so on. And that's how it progresses. Okay. Okay. Okay. Understood. Interesting. Uh, ooh.
00:27:51
Speaker
You said you want to serve founders, you want to give them more service. What does that mean? Beyond money, what else do you give to a founder?
Supporting Founders Beyond Capital
00:28:00
Speaker
So again, that support or service change from stage to stage. The ground floor we interact, I think it is a lot about just brainstorming with them and being an objective partner in their journey.
00:28:17
Speaker
So each founder has a passion for why they start a business. Obviously, there is a financial motive, there is a business to be built, but it is always an emotional angle or part of their ambition, of their desire to start a company, which is great, which is what keeps them going in tough times. Our hope is that we help cover up for any open questions in their mind.
00:28:42
Speaker
where they can brainstorm. We help them build the remaining part of their teams. Organization is the second piece that we have. We have internally somebody who just does recruitment for portfolio companies. So making them aware of what could be the right organization, where could these people come from, sourcing, interviewing, and so on. But those are a lot of discussions that all what is the right business to build.
00:29:07
Speaker
Should I take this call or that call? And there are always choices when you're starting a business. Should I double up or should I be more careful? What will the next year fundraising environment look like? What is the right margin structure in my business? Should I acquire customers more openly or should I, again, hold back and be more careful? So those are validations, sometimes questions that founders seeking their views on and help on.
00:29:33
Speaker
Also, in early days, there are a lot of support functions that they don't want to hire for. So like finance, right? While everybody understands the importance of compliance and governance, it is just hard for them to hire a CFO member. Again, we have a three people finance team and a good part of their time is just helping them structure their compliances, their governance requirements, and board members help structure the MIS. And MIS is not just numbers, it is about what is important to try.
00:29:58
Speaker
And setting those matrices, sitting with the founders. And then creating a discipline, almost on a monthly basis, going over it. And multiple times I found, especially first-time founders, who after three, four months will come and say, this whole cadence of doing stuff monthly helps us sit back and take our view every month on where our business is. Otherwise, when you're running a business, there is no time. Every day looks like a new day. You are just going with the flow in some sense.
00:30:28
Speaker
But those are some of the things that we do when we are early. Once there is a PMF, you know, these companies need ranks on financing, so they are looking for our support and also looking for help with external support.
00:30:41
Speaker
and getting them ready with what is the right pitch, what is the right amount, who's the right investor to talk to. There's another area of help that I would say we do. And then as stage changes, requirements for the company also change. If they figure out one category, then question is, should I enter another category right now? What is the right category? If they have entered one market, then they might say I won't be entered on the market. So there are always expansion plans that kicks in around series B, C timeframe.
00:31:10
Speaker
that they got involved. Then at some stage, they will say, should we go public? If we have to go public, what do I do two years ahead of time? So those are things that happen. So depending on the stage, we figure out our strengths and service the founders accordingly. But at a very, very high level, I would say, I think the most important piece is understanding or putting us in founders' shoes.
00:31:36
Speaker
and understanding the pains and then responding accordingly. I think that is there. And I don't want to claim that we are best in the world around that. We all have a lot to learn. But that is one continuous reminder that we give to ourselves or tell ourselves that that is our job. And if we can make them succeed, they'll make sure the company succeeds.
00:31:58
Speaker
Right, right, right, right. Amazing. What is your specific area of expertise? You say everyone at Stellaris focuses on something. What do you focus on? So most of my focus has been, and this is over the last 17 years, has been mostly around consumer businesses and within consumer. So I'm taking out fintech, health tech, mobility. Those are also consumer businesses, but that's not what I do. Most of my consumer focus, one is around commerce.
00:32:25
Speaker
So be it a consumer brand, be it B2B commerce, B2C commerce, that is one broad area. The other is consumer tech, which could be a digital content, a social media platform, a gaming company, a creator economy company, and then edtech. So these are three broad themes of sectors that I spend most of my time on.
00:32:47
Speaker
Okay, interesting. What is, you know, for an ad tech company, like you said, you help them figure out what metrics they should be looking at, what matters in an MIS, and MIS can't be a one size fits all. So what do you tell ad tech companies in terms of what metrics and what their MIS should look like?
00:33:09
Speaker
Yeah. So again, it depends on the stages of business. I think the most important piece and mostly gets missed by tech companies is customer getting the promise that you gave them, or is the promise getting delivered that you gave them and you sold a program. And I'm more talking about, let's say, somebody doing coaching, somebody doing tuition, somebody doing test prep and so on.
00:33:31
Speaker
Only there are other kind of, you can have a net tech software company, you can have a net tech community company. So I'm not talking about those, but the mainstream of the market, which is where people spend money on. Are you delivering the promise? And that is about efficacy. So can you, or do you measure on a monthly or a quarterly basis, how is the performance of a student improved by doing your course?
00:33:56
Speaker
To me, that is the North Star matrix. And if one can solve for that, you can solve for most of the problems you might take, or most of the customers will come to you for that particular problem if you can solve.
00:34:07
Speaker
You know, the whole notion of CAC and all that all goes away, because the customer will stick around, stay with you, will pay you the money, if you can deliver the problems. And if you look at the offline behavior of ours, I think as Indians, we are for our kids, for ourselves, we'll pay, you know, whatever is needed, if I can get high quality education. So there is no reason why an tech company can't tap into their margin.
00:34:33
Speaker
And the way to judge efficacy is through assessments or maybe through. So multiple ways. Let's say you are teaching somebody for an exam, which is one year down. You can't today figure out whether this guy will succeed or not. That might take you a few years to predict. But in early days, then you look for quarterly or monthly results. What you do is you do a very simple test at the start of the month. You do another test on the same topic at the end of the month.
00:35:03
Speaker
you do for one topic, you do it for multiple topics. So breaking down the one year into multiple smaller pieces, and then seeing whether it led to any performance improvement. And see again performance is also in some sense, let's say one month out performance is dependent on how much this person is spending time with you. So on a daily basis, are you seeing engagement? Are you seeing papers and lessons being completed?
00:35:28
Speaker
So a lot of things that can be done to find whether the product is useful for the student or not. Yes, when you're down the line finally, if you have promised them an entrance exam preparation, then are you able to get trans in that entrance exam? That is what matters.
00:35:47
Speaker
Okay. Interesting. What about for like gaming and content kind of companies, which are like not in that series? So again, depends. So like we have invested in a company called Dash 2, which is in the content space. They're building a webcomic platform for global consumers.
00:36:04
Speaker
But the back end, they use Gen AI to help anybody with an idea or a creator to build a web comment. So reducing the cost of content generation for a comic creator at the back end, which allows what Instagram did for pictures. In some sense, it can go for comics. If you have an idea, you write it on a piece of paper and automatically generate comic product. So that is on the back end side. The front end for a consumer is great content. And it's a format.
00:36:32
Speaker
Just like you go to Instagram for pictures, you go to TikTok for short videos, you go to Netflix for high quality movies. This is a form, or you go and read novels when you want to read books, textual format. This is somewhere in between where it's graphic, but it is more richer than a novel, but less richer than a video, right? So it's a format. So what matters is, are you able to get hours or minutes, how many hours and minutes of a day of for person? Are you able to get to spend on your platform?
00:37:02
Speaker
We all have a certain time of the day that we use for entertainment purposes. This is one of the entertainment formats. That is where the business starts from, and that is what matters on day one. Now, clearly, you might have different monetization angles. So some people, like YouTube, would say, I am monetized based on ads. So they will have a different view of measuring whether revenue potential is getting realized or not, which depends on quality of users, time spent on the platform, and so on. In their case, it is more revenue or revenue that user is paying for viewing the content.
00:37:32
Speaker
So it is pay-per-view model. So you get to see a few episodes free every day, and then if you want to see further episodes same day, you pay. If you want to see free, you can wait for one day and then see them tomorrow. So there is that hook that you need to have. No doubt, everybody will do it. Maybe two, three percent of users will actually pay, but that is where you generate your ME from. So different level of PMF, but the first one is, are you able to get people to spend time in a platform?
00:38:00
Speaker
That is what matters in an entertainment business.
Key Metrics in Gaming and Content
00:38:04
Speaker
Okay. And then probably next would be how many convert into? Yeah. So those are all downstream points. You're right. And see conversion also depend on your price. I may be okay paying 10 cents for the next episode. Somebody suddenly you see conversion change. If you make that price in seven cents, right. So you have to find that balance on, you know,
00:38:28
Speaker
What do you want to monetize or what need you want to monetize for? And this is very similar in gaming also. The whole in-app purchase is all about ads. It's all about intrusion in some sense or friction. But you have to create only so much friction, otherwise you lose the audience. So you have to find that balance and it takes time. There is no answer on day one. You start with some hypothesis and you tinker around to get to the right number or period of time.
00:38:57
Speaker
Okay, interesting, interesting. There's this concept of power law in venture investing. What is that? So see, ours is one of the highest risk asset class.
00:39:14
Speaker
We enter and my parents still don't understand what I do and how can I do it. We invest in a company. There is no collateral, no debt, no security. There is no business most of the time. There are just three founders or two founders starting the company. An idea which always sounds crazy when we invest. If it sounds normal, basically, then we are not taking enough risk. So in some sense, by nature,
00:39:44
Speaker
However good an investor we are, a lot of these businesses will fail, right? So the concept of power law is, one is that, you know, this whole concept of high risk, high return. So somebody lets our LPs investing in us. They understand the risk they're taking, but for that risk, they want high returns. So it can't be a stock market return, right? If you are getting 12% year on year and I deliver 15%, that's not good enough for them.
00:40:12
Speaker
There is a risk percentage attached. So for that to happen. And the fact that let's say we make 20 investments, we know a lot of them will fail. The concept of power law essentially is that the ones that succeed should overcome for all the losses and provide the high return that that investor has taken a bet on.
00:40:36
Speaker
So, in that context, the ones that succeed, and let's say 20% of companies succeed, which is a great outcome for a venture fund, out of 20, let's say 4 succeed, those 4 need to deliver, each company needs to deliver, let's say 20x on the capital investor, 30x on the capital investor, for the fund to return 4x, 5x.
00:40:59
Speaker
So that is all that means, it means the power law. And that is why there are certain investments that are good for venture, but there are certain where I don't think founders should raise venture money, they should build their own business and they are also great businesses. So it is not a value judgment on a type of business, but there are certain businesses where I think venture investment makes sense. What's an example of each type?
00:41:22
Speaker
Again, you know, harder to generalize, but let's say you're setting up a chain of movie halls, or you're setting up a manufacturing plant for, let's say for assembly of certain auto parts, or you're setting a steel plant, right?
00:41:44
Speaker
Now, two different buckets. First one, if you tried, because venture industry also has a timeline in mind. A lot of funds are like 10-year, 12-year funds. They need to get to that large outcome from zero to outcome within that time period. If you are setting a chain of cinema halls, movie halls, the amount of capital you need to grow very fast is quite high. Similarly for a steel plant. No venture investor can fund a 2,000 crore steel plant. It might be a great return.
00:42:14
Speaker
But who will take that risk or that amount of money? In the first case, you don't know what kind of cinema movie house will work. So if you start in Tainan, Devan or Vastir, you will make mistakes in locations.
00:42:29
Speaker
in the size of the movie walls. And it is very hard to undo those kind of things. So there are certain investments. What a manufacturing plant for auto supplies. There is a certain ROC you get. You have 15% margin, 20% margin. But it is a plant at a time. So these are an example of a business that can become large, but need not be venture invested. So venture investment, I think companies which start with smaller amount of capital,
00:42:57
Speaker
can scale fast in that time frame. If those characteristics are there on day one, then I would say those are one that we qualify to venture. Also, I guess like a large TAM, like a total addressable market should be large for it to be venture. I should have mentioned this.
00:43:17
Speaker
I have struggled with this notion of TAM and that was another mistake I made in the early part of my career by trying to exactly pinpoint the size of the market. I see multiple cases where founders find market expand as this service expands. So you look at an Ola or Ova. When we invested in a company called taxi for sure at Helion, a rotational partner led that investment. The total CAM market was
00:43:44
Speaker
200,000 cabs in India. That is what the supply was. So you try doing whatever math you do, that we'll run this cab, we'll get every cab on the platform, and we'll give them eight hours, 10 hours of customers. You still can't figure out how is it a large market. Today, Ullana alone has more than 500,000 cabs within their system, and then Uber will have more. The market expanded. Now, you can again, you know, counter argument currently, why were you looking at supply? You should look at how many people travel by car.
00:44:15
Speaker
But, you know, we all have our own ways of imagining market. When they started, the baby care market was a billion dollar. How will you look at it? Today, the companies are two billion dollar market care companies. The brand itself had a certain value problem. Now, there are six brands. So, you give them another 10 years, they'll have like 20 more brands. So, what is market? What is the size of the market? That is for, in early days, very, very hard to define.
Assessing Founders' Ambition
00:44:43
Speaker
So, you try to see the beachhead market is that large enough and then is the founder ambitious and can evolve to find new areas that they can expand into. Now, it can be totally different area. So, you can't say I'm a fashion man and tomorrow I'll launch a taxi app because that's another interesting market. So, yes, you have to build on your strengths to become larger.
00:45:08
Speaker
So it is like I struggle to put an exact time into the equation when we are coming into the company for our stage. Interesting. How do you judge ambition of founders and the ability to execute? These are the two things you over index on, ambition of founder and ability to execute. How do you judge these? So it is a bit tricky.
00:45:36
Speaker
and see ideal cases when you get to meet founders over a period of time and you see their thinking evolve. But lot of time we don't get the opportunity to do that. So a part of that is
00:45:51
Speaker
talking to their past colleagues, if they're worked, their team members, their managers in different industries. You get to hear whether they were pushing boundaries, whether they were stretching, whether they were comfortable in what they were doing. Somebody is satisfied versus somebody wants to look for more bigger and bigger things.
00:46:16
Speaker
At least on day one, on the onset, this person wants to build something more or always try to do something new. The second is the idea they come up with that itself gives you a sense of, is it groundbreaking or not? And if it is not, then also you see a reflection. If it is more of the same, then it's a reflection of lack of ambition.
00:46:47
Speaker
And a mix of those two and then time spent on logic. See, I can build a plan which says I'll be a $5 billion revenue company in five years. But what is the underlying logic? Have they thought about it? So there is a mix of ambition and reason that needs to be there. Just one of the two won't help. And that is what we try to assess.
00:47:12
Speaker
Okay, interesting. Are there signals also that help you judge, for example, a couple of VCs have told me that introductions from portfolio companies is a strong signal for them? That to me is a signal of hassle. Whether they are okay just sending a cold email to our contact ID or they will take the pain to find one degree connect and get an introduction.
00:47:43
Speaker
If the introduction is for somebody that they have worked with in past, and that person is respected, clearly it matters. It gets you on top of the list for people to talk to. But to me, that is all sign of hassle. See, intros only get you in the first conversation. Post that, it is up to you to win or lose, or convince or not convince. That is not to do with the founder themselves.
00:48:10
Speaker
on whether they're able to showcase that or not. I also want to be careful that there are a lot of time when appearances can be misleading. Which is why it is hard to judge in a very small frame of time. If we had luxury of time, I would ideally meet founders six months ahead of their fundraise. You just be with them to understand how they're thinking of the business.
00:48:37
Speaker
You know, without naming the founder, I think I was lucky to be part of their company in Helion. And that founder struggled to present to anybody, even to two people sitting in a room. That person is just struggling. Today, you will see the amount of Instagram reels and TikToks and all that. But founder himself does. Not the team is doing it. He is doing it. So he's more comfortable. No.
00:49:05
Speaker
Because of that discomfort, sometimes he may not be able to communicate his ambition, which is why I think appearances can be misleading. But unfortunately, I don't have a very good way of covering up for that in 100% cases.
00:49:18
Speaker
Just a little bit zooming into this. So the founder was struggling to present his ambition, his vision, but he's still invested. But you're still invested. Yeah, because this was slightly later stage business. So we could see the love for the product. And which is the other realization about a founder, say finally you have to find some spike in the company to get you interested or excited. Sometimes when you're doing it very early, it is mostly the founder.
00:49:46
Speaker
But if there is some business, you can see over the three, four years, they've just out-executed everybody else and created a winner in the market. So then what you're saying is, can this winner become a much larger business over a period of time? So that is a bet you're taking. But when they are very early, as I said, sometimes I might be overlooking things that matter just because of how they're able to articulate, communicate, and so on.
00:50:16
Speaker
Amazing. I love your humility. It's simply phenomenal. Okay. So, you know, what is the way in which exits happen? And, you know, that also must have evolved over the years, probably during the helium days, exits must have been much harder. But this overall, how do exits happen? How does the VC firm finally get the money back?
00:50:39
Speaker
Yeah, so there are two, see there is an exit for the company and there is an exit for a VC firm, right? And sometimes they might be different and a lot of times they are commoners. So I would say one of the better exit paths, at least in India, I would say is to go and list. Indian public market is quite well priced. Also, they don't get to see
00:51:03
Speaker
startup getting into the public domain and becoming marketed and then listing. So there's a lot of demand for those kind of stocks. So I think the best outcome is if you can list. But on the other side, it also requires a lot of commitment from the founders to continue running the business after it is listed. Because VCs and investors will exit, but they still have to run their business for 10 years, and then one day maybe find a replacement as a CEO and all. But they need to be committed.
00:51:35
Speaker
Listings, I'm guessing would happen like maybe 0.01% of funded startup. Yeah, so I'm starting from the top. And I'm more also talking about those big outcomes first. So if you want a big outcome, either you list or you get sold to a very large competitor or somebody wants to enter into the country.
00:52:01
Speaker
Those are two ways to get large outcomes. The third way for investors could be selling to a much later stage investor. So I entered at CED or Series A. If the company is doing Series F, at that time, let's say our fund has made 20x, 30x, we may want to sell some portion of our stake. It allows the company to raise money from that investor because that investor is looking for certain ownership.
00:52:28
Speaker
Company, a lot of time by that time, don't need a lot of primary capital. So it serves everybody's needs. Let's say investors, borrowers, and the founders. And that's the third kind of exit. These are the three where you get large outcomes.
00:52:45
Speaker
There's a middling one, which is you still sell the business, but you may be at a series B, series C stage. So not a great outcome for the fund, but at least it gives a home for employees. And I would say founders also make good amount of money even in those cases. So it's a win-win in a case where companies are not necessarily going to be a market leader or have not been able to figure out a large market to build a business.
00:53:14
Speaker
So that is the second and the third one, which is not a great outcome for anybody is coming to closing down. That's what an exit that just shut down. Like a sale at like less than what they raised that. Yeah, that is getting more people call aqua hiring or aqua hiring. Okay. Where it is more acquisition for team more than anything else. But in my mind, I'm just broadly clubbing it as a shutdown. We were great teams find place.
00:53:44
Speaker
And the legacy Indian businesses, how open are they to like, you know, fund startups, either as LPs or in acquisition or acquiring? So I think compared to maybe five, six years back, the scenario is very, very different, very positive. So over the last few years, you would see the number of EIFs.
00:54:08
Speaker
that have been created and a lot of that money that they have raised is from family offices in India or corporates. So that is a good pool of capital that is emerging. It is still young. I think people are still learning from their first phase of mistakes and so on. This is something that you see well-practised in US and Europe, but I feel it is still young. I think as these families are still understanding the risk appetite,
00:54:37
Speaker
that they need to have, they need to be comfortable that one fund might, in a franchise, may not deliver so great returns. And hence, if you're committed, you commit for three firms. But those are the kind of things that I think will happen. It is still a young journey. In terms of corporate sequiring, you will see people look at the number of companies start out, reliance, and so on are required. So I think that Epidite, I wish, was more. But I think it is on the right trend. It will only increase from here on.
00:55:05
Speaker
They all want to embrace technology, want to get into new areas, new channels, new brands. So as that happens, more and more of those acquisitions will happen.
00:55:17
Speaker
Help me understand the startup investing ecosystem in India broadly. How much of investment in startups comes from domestic capital? How much comes from foreign capital? You mentioned about EIF. What are the different structures through which startups raise money or through which people invest in startups?
00:55:39
Speaker
Yeah, so if you think of a startup raising money, there are multiple types of institutions of people they can go to. To start with, there are angels or super angels, people who are individually investing their own money, either sporadically or very proactively. Most of that money is domestic. That is coming from people, HNI's, startup, late stage founders and so on.
00:56:04
Speaker
Then there are early stage funds, so people like us. Then you will have, again, series B stage, series C stage, late stage, and so on. I would say on the institution side, most of the capital is still foreign. In recent times, that makes us change. But most of the money from global, or if you look at funds that are global brands in India, all their money is global.
00:56:32
Speaker
They may not even have a vehicle in India. All of that comes from let's say Singapore-based vehicle and so on, and that's all foreign. Then public market, clearly that is mostly Indian money, though there are foreign institutions also coming. So beyond India, I would say the mix has been mostly foreign, but the percentage has shifted a lot over the last five years.
Indian Investment Landscape and LPs
00:56:58
Speaker
as more families and corporates have made started making funding research. So that shift has happened. The structure generally, again, two or three types, when individuals are investing, you know, they create these SPVs or they do direct investing as engines. They are performed like Angel List and Let's Venture who allow you to create these SPVs to make those investments.
00:57:25
Speaker
Angel networks also, right? Like move by angels or like inflection point ventures. Yeah. So I call them all in angel or micro VC category. Okay. See when you are raised at 10 million, 20 million, 30 million fund, most of the money is domestic. Okay. But you might have some individuals from global market, but most of that money is domestic.
00:57:47
Speaker
So, the Indian list, Indian network, they are all domestic capital. Sometimes they invest in their own capacity, sometimes they invest through a vehicle. So, you might have an SPV for a particular company that you invested in from IAN and so on. DC funds, now we are seeing a good mix. There are few which are more AIF and gift city based funds.
00:58:12
Speaker
And what does this mean? What is the implication of being an AIF? AIF is Ultimate Investment Fund Vehicle. This is something that you register with SEBI. So it is, in some sense, there are different categories out there. There is a category which is only to invest in public market, there's a category to invest in small investment, and so on. So like, for example, Stellaris has an AIF, which is an India registered vehicle.
00:58:36
Speaker
The advantage is that vehicle can raise money from Indian institutions, Indian individuals, and so on. So the domestic capital gets routed here. You might have a foreign pooling vehicle. So people might have a vehicle in Mauritius, in Singapore, and so on. A gift city, which you mentioned. That is not now a gift city, which is gaining a lot of traction. And the point there is that instead of getting 10 foreign investors individually into the AIF,
00:59:05
Speaker
You get them in one vehicle in the gift city and then the gift city can either directly invest or invest via AIF. But the whole hassle of getting a pan number in India, filing an annual taxes, that hassle goes away for people who are coming into that gift city vehicle.
00:59:21
Speaker
We will then give city to file one single tax return, follow all the tax laws of India and so on. So it is less hassle for people who are coming in. So that's the advantage of those kind of reasons. Is this something that's unique to India, the fact that foreign capital comes through some other route?
00:59:43
Speaker
I don't think it is unique as in, you know, if you are, and sorry, I don't understand international jurisdiction as well, but I assume if you were to start investing in US, you will have to do some kind of tax spending. Because US would like to know what did you do with the profit, did you pay tax or not? But if you create a pulling vehicle, let's say in Delaware.
01:00:04
Speaker
Then that pulling Michael does all that effort and it's less hassle. They're supposed to be, one has to incur, but at least that hassle goes away for those investors. Okay. Okay. Okay. Understood. Okay. How much of your capital is domestic in this 225 million? I would say about 70, 75% of our capital is global. Okay. And about 25 what percent would be more domestic.
01:00:29
Speaker
And how did you learn to raise global capital? That must have been a journey in itself, right? Yeah. No, and that's a very, I would say, an amazing experience. You know, as I was earlier saying, I have never done sales in my life before, but it is sales. And when you're doing your first one, you are the product that you're selling. There's nothing else. You can talk about all the past track records and so on.
01:01:00
Speaker
But if somebody is giving you $1 million or $30 million, finally they're giving it on a promise. And how do you convince somebody? So clearly, that was a journey. It was not easy. And interestingly, this is 2016. Most of the global LP questions are more about India, less about us.
01:01:23
Speaker
Because that time was when the Ula will survive, what will happen to Flipkart, Snapdeal, and so on. So we were answering questions that were not ours to answer. But we had to answer. You had that credibility of Helion. So the question was, what? Yeah, so it helped. That clearly helped. A lot of our founders from that portfolio supported us. So that gave credibility to our efforts.
01:01:51
Speaker
So I would say the fact that several individuals in the industry supported us was overwhelmingly a positive response that I had not expected initially at that time. So that in some sense told us about our own equity beyond the franchise that you're part of. So that clearly helped. And then you need in this business to at least get the funding, you need one or two key
01:02:21
Speaker
initial supporters and then things start to happen. That's what happened with us. We got two or three institutions committed to us once. We had enough individuals from late stage, founder community, portfolio founders of ours, and that got us into business. Once you are in business, a lot of things go your way. As I say, most companies
01:02:46
Speaker
when we succeed, they can give all kinds of reasons. But I feel 70% of the reason is just external alignment of things. Right place, right time. Right. So that is not in your control. And that was true for us also. We put a lot of effort, we put right effort, but you could have totally failed in a different era. But in that era, we succeeded. And that got the train starting.
01:03:07
Speaker
Amazing. How humility runs through your answers. It's simply amazing. I love that. Okay. How did the fun one perform? Have there been any exits on it so far?
01:03:21
Speaker
Now again, quite lucky to partner with some of the most amazing founders of that era. So one of our portfolio companies, Mama Earth, from first fund went public last year. So that was a great outcome for the fund. I think we already made like 40x plus on that particular investment.
01:03:38
Speaker
We have a company called Whatfix which is not yet public but doing very well. Great traction, they are a global market leader in what is called digital adoption category. We were the, you know, the series investor in that company when they were less than half a million dollar a year.
01:03:58
Speaker
being able to do well. We are in a company called Propend, which is an e-tech lending. Again, amazing execution in unsecured loan. Their cohort of bad NPS is less than one and a half percent, which is totally another. And growth and capital efficient in terms of burn also. So, and there are another six, seven companies in the first one. So, first one, you know, both in terms of
01:04:24
Speaker
money return we are already done very well, but also in terms of current multiple that we are sitting at and the net error. I would say we would be in the top decile fund in the emerging market for that advantage. Wow, amazing.
01:04:39
Speaker
So performance has been great, but as I was saying initially, you know, the clock restarts with every fund. So while one successful fund is great, we still need to find ways to make our second-print successful. It is still young. It is less than three-year-old fund. Some great companies. One too was in 2020, I guess. 2021. That is when we raised our second fund.
01:05:03
Speaker
So I'm wondering, 2021 valuations are very different from today's valuations. Did that cause some amount of readjustment? So Akshay, the advantage of being in industry long enough is there are enough mistakes you made in the past. So when we were starting Stellaris, one thing we realized is there has to be some method to the madness.
01:05:31
Speaker
And at a fund level, we felt that there has to be, you can't suddenly become bullish or bearish about startups in India just because market is behaving in certain ways. So what we did was that, because ours are not, see, we don't enter today and exit tomorrow. Then market sentiment matters, right? But when we are investing today for investment eight years out, or exit eight years out, I have no idea to know what will Indian market look like eight years from now.
01:06:01
Speaker
So I have to invest assuming fundamentals are going to train in the right direction. And in that context, I can't be intelligent to say this year is the best year to invest, and next year is the worst year to invest. Because I think it is no global VC has been able to do that, so there is more reason why Stellaris can do it. So the way we have built our thought process is, start a fund, you have a size. So second fund in let's say $225 million.
01:06:32
Speaker
We decided that we'll invest this over three and a half years. And what we said is, let's now figure out a pace of investing based on how much we want to reserve for follow-on and how much we want to do in the first check. So the number we arrived at was eight or nine companies in a year. And then 2021 started. We had our fund in early part of 2021.
01:06:53
Speaker
and market was crazy. There are investors who did 30 deals in that year. We did 8 deals that year. We basically said we have to raise our bar. There is no other way because it can't be that India suddenly becomes so attractive that you do double your face. But next year when everybody was holding back, we did 9 deals that year. So we have to be okay both ways. We can't say we do one but not do the other.
01:07:19
Speaker
So, we have realized again, this is again a hindsight realization. It is very hard to predict in that year, but the hindsight realization is best investments happen when everybody's bearish. So, 2017 when we made investments in companies, everybody was bearish, and some of our best companies were that year's investment, and early 2018. Similarly, if you look at investments, Celion made in 2008, in 2012,
01:07:49
Speaker
those are all bloom times of India. And that is when best companies were created. So again, these are all hindsight, because you don't know whether 2008 is a bad year or 2009 is going to be on worse. That is starting in 2008. But you need to be OK taking those investment bets. So in that sense, while we don't blindly invest, but our investment pace is like an SIP of mutual fund.
01:08:18
Speaker
that we know we have to deploy this much amount broadly. Now, in that year, we don't find a great company, 8 might become 7 ones. But we don't want to start investing in 12 companies in a year, if our piece
01:08:32
Speaker
is 8. If our pace is 12, we do 12. But that is how we maintain a constant pace of investing. And in that context, when the market is hot, we have to say no to certain kind of deals. Now, sometimes the deal could be where we don't believe in the business. Sometimes the deals are where valuations are too high for us to get the right ownership. So the way we adjusted in 2021, when, as I said, we did less, 8 deals only, whereas others did more.
01:08:56
Speaker
We also did more CDs than we did series because series rounds were very, very expensive in that day. Seed rounds were slightly expensive, but there we could still get the ownership by investing another half a minute in that company. But series rounds were possible with our front side. So, that's how we adjusted our strategy and then next year we did more series.
01:09:20
Speaker
You know like valuation of publicly listed companies is like a well understood subject with lots of books and you can use discounted cash flows or number of other methods to arrive at a fair value. How does valuation work in like an early stage startup at seed level where there is no such thing as a discounted cash flow because you don't even know what a cash flow would be like one year down the line. Yes. So in our point of entry,
01:09:50
Speaker
It is a math about what exposure are you taking and what ownership you're getting in return. Now that exposure has multiple facets. One is, are you giving enough to the company so that they can get to the next stage? And next stage will have different definitions depending on the sector. If you're in SaaS, investing in a business plan, you might say they should get to at least a million dollar era.
01:10:17
Speaker
before they go for the next round. So is there enough money for that? And there is an assessment you do. Second is the kind of business. If you need to invest in inventory and there's a minimum order size you need, if you give lesser capital, the founder can't even prove the business. So that is the other one. The stage of the business. If the business is already running versus they're just going to build, how much capital are you taking the risk? And different funds, they'll have different
01:10:45
Speaker
risk exposure math, some fund might be, I'm okay doing a $5 million business plan bet. Somebody might say, I'm okay taking a $2 million business plan bet. So that math varies from fund to one. Then the ownership, that am I getting the right ownership? As I was earlier saying, if I invest one and a half million and I get X percentage, but I want not X, but 1.25X, then I might be okay investing another 300K to get to 1.25X and
01:11:14
Speaker
If my risk exposure for seed is up to 2 million, then 1.5 and 1.8 million actually is not too much of a difference. So it is that ownership and exposure that matters. As you become slightly, let's say, when you raise Series B, then a lot of time your valuation is based on your revenue and your gross margin structure. Later on, it becomes more margin oriented. So over time, and when you become public, I think it is a question of your profitability today and what you can get two years, three years out.
01:11:44
Speaker
which is determined by your margin expansion and your revenue growth. What ownership do you look at at a seed stage company? What is the comfortable number? Again, a little bit varies, but between 15% to 20%, by the time series has happened. That is something that we care a lot about. And we see a lot of great founders hopefully will build large companies, but if we are not getting the right ownership, we struggle to partner with them.
01:12:13
Speaker
And why do you want this kind of ownership when other funds are happy with less? You have broad math that at the time of exit, let's say you are a one and a half billion dollar outcome. In a base case, success. So even those four or five outcomes that come out, they'll have different levels of outcome, right? So base case, let's say one and a half billion, let's say you own with all the dilution, when at 10 you own 10%.
01:12:40
Speaker
then you will get $150 million for a success in a $225 million fund. If you get four such successes, then you get $600 million. It is still not a great outcome. You still made less than 3x for your investors. Out of those four companies, the assumption is one of those four will not be one and a half, but will be larger than one and a half. It could be three, it could be four,
01:13:08
Speaker
We have nowhere today of knowing which of the four will be that. But there is a belief and assumption that it will happen. And again, remember, today where I'm sitting, I'm talking about six, seven years from now. So market gap of companies will be larger, Indian stock market, Indian market will be larger. So there is certain outcome size that will go up. But if you think of this math, if you don't start in 1520, there is no way you'll end at 10.
01:13:36
Speaker
Because as an early stage investor, we'll do seed and series A, we'll protect our ownership in B, some in C, after that we can't, we'll dilute. So that path is very clear. And it is hard to underwrite five billion outcomes on data, that all five will become, or four will become five billion. Then the math could be different, then you're okay with lower ownership also.
01:13:59
Speaker
But we all have our own optimism. When I look at the Indian public market, $5 billion is not a usual large outcome. It's a really large outcome. Yes, yes, yes, yes. Exception, yes.
Understanding VC Funds and Investment Flow
01:14:12
Speaker
OK, that's interesting. So you said 3x of, like if you do 3x of what you raise, it's not a great outcome. Yeah, because for our investors, right, they have to, there's a profit share that happens. So this is the gross.
01:14:30
Speaker
The net will be much lower than that. If they have to, let's say a fund takes 20% carry. And what does that mean? Just help me understand how a fund learns. Yeah. So the big outcome that we are all working for financially is the profit share from our successes. So at a fund level, if I have made $600 million outcome and 225 is the principle.
01:14:59
Speaker
Basically, that is $375 million of profit. And then you get 20% of that. So in this map, let's say, broadly, you got $75 million. And that is then distributed to everybody in the team and so on. But in this case, out of the $675 million, $75 million is gone as carry. So what the investor is getting is only $525 million on a $225 million investment. So it is like maybe $2.5x.
01:15:30
Speaker
Uh, which is like, okay. Yeah. He would have got similar. Uh, like if you just think of this math now, you know, we need to shoot for very large outcomes. Uh, but this math is like, okay, it is not great. It is not bad. Uh, but if I am an LP in that front, I want more.
01:15:55
Speaker
Okay. Interesting. Interesting. Interesting. You know, I've been reading about foreign capital getting switched off from the India story because there are not enough exits and startups are overvalued. I just wanted to hear your take on that. So I would disagree with that statement. And I'm talking, if I look at the last one year of India, if you look at the public market performance,
01:16:24
Speaker
If I look at the number of new investors who have come to meet us, and we are, no, I don't, I will not call ourselves as, you know, the first fund people will think of. We are still, we hope one day we'll get there. But that number of people who want to meet us has gone up 10X over the prior years. So, and part of that is to do with how China has performed. Part of that has to do with the macro view on India.
01:16:54
Speaker
you know, the size of the economy, young population, tech enabled population, growth rate of the economy, make on multiple counts, clarity of policy. On multiple counts, people feel that if there is another large market outside us, they can invest in India is the market. So I feel they will see oversupply of capital for the next 10 years. In fact, I worry about it.
01:17:19
Speaker
that it shouldn't change our behavior. I think our behavior as a community is much better now than it was in 2021. So I hope we don't change our mindset, but I think we will see oversupply of capital. In a particular year, you might see mood go up and down. In fact, I would say in public market, most of the startups are not like overvalued. What needs to happen this year is there are so many of them lined up for going IPU.
01:17:47
Speaker
As in when they become successful outcomes, I think it gives a lot of confidence to people who invested in startups, who have been LPs in funds to say large exits can happen. So trending in that direction, another year or two, we'll see a lot more outcomes also happen. Okay. Interesting. Interesting. So let me end with this question. You know, in general, what advice do you have for founders, you know, specifically founders who want to raise from a fund like Stellaris?
Advice for Founders Seeking VC Interest
01:18:17
Speaker
So one is, as I said, we like founders who are looking to be large companies. We like founders who are thinking, in some sense, breakthrough ideas. And we're passionate about the building. I have not seen a single company that has only gone one way and tragically, which is up north. That doesn't happen over the seven, eight period. So you will face difficult time. Are you able to sustain it and so on?
01:18:47
Speaker
And in some sense, the founder who's truly thinking not personally, but more for the company. And when that happens, generally I've seen good businesses being built. So fundamentally, good business, good thinking, some innovation. And then at least with Stellaris, I think we find a challenge if founders not thought through enough on their decisions.
01:19:16
Speaker
They may not have all the answers, but at least the answers they have, they should have, you know, if I'm saying I build this product, then ideally you should have talked to 20 customers to get some validation. Or if I want to build in this geography, that particular price point, then what are the reasons behind it? And that is not to say whether your decision was wrong or right. It is just to see how you take decisions.
01:19:42
Speaker
Is there a first principle thinking? Is there a logic where you don't have data? Do you gather data in some other manner? But basically, improving a chance of success, right? If you are more logic-based, you can always succeed once in a while being irrationally logical. But that is once in a life where I can't predict it, so I would rather control the country level.
01:20:08
Speaker
Does a deck generally convey ambition of founder, how well they have thought through and whether they are being logical in the approach? Do you have any advice on how a founder should get you to agree to meet him? How should they approach it so that you agree for a first meeting or a first call?
01:20:32
Speaker
So as we were earlier saying, showing some hustle on how do you reach out, that matters. Deck is interesting, but I don't think that is the only important piece. I think deck does convey lack of clarity or a lot of clarity on founder's viewpoint. But I won't anchor too much on the deck alone. So if an email can describe what you want to do,
01:21:00
Speaker
on why you are the best place to do it, or a deck, it doesn't matter. And see, we all have our own biases. So I may have a bias that this sector I don't like, or this model I don't like, in which case I might just say no on email. That also happened. But the good part about fundraising is you need to find one person who's convinced. So you will hear 20 nos or 90 nos, you need to find that one person who says yes to you.
01:21:29
Speaker
So, a little bit of preparation ahead of time on, you know, if you're meeting that investor, what stage they come in at, what have they done. You should study the investor. That helps you be better prepared in the meeting.
01:21:43
Speaker
And that brings us to the end of this conversation.
Conclusion and Feedback Invitation
01:21:46
Speaker
I want to ask you for a favor now. Did you like listening to the show? I'd love to hear your feedback about it. Do you have your own startup ideas? I'd love to hear them. Do you have questions for any of the guests that you heard about in the show? I'd love to get your questions and pass them on to the guests. Write to me at adatthepodium.in. That's adatthepodium.in.