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The Series A VC Reshaping Indian Startup Funding | Rajeev Kalambi @ Cactus Partners
62 Plays2 days ago
Most founders chase the billion-customer dream and the unicorn lottery at the same time. This India VC funding strategy conversation dismantles both, as Rajeev Kalambi of Cactus Partners explains why he deliberately refuses the power law, why there is no single Indian market, and how he targets steady returns instead of moonshots.
With 26 years across corporate banking, investment banking, and buy-side fund management, Rajeev Kalambi brings a downside-first discipline rarely heard in venture capital, having lived through three funding cycles in just five years.
At Cactus Partners, the early-growth fund he co-founded, he writes first institutional cheques at Series A into post product-market-fit companies with industry-beating gross margins, deliberately occupying the underfunded gap between crowded seed funds and late-stage private equity.
In this conversation with host Akshay Datt, he argues that India is really three or four economies and only the top 10% truly pays, that premium beverages can never scale because you are effectively shipping water, and that smart investors sell picks and shovels rather than prospecting for AI gold. He also breaks down his 5 Ts framework and why GMV masks the only number that matters, the take rate. As funding stays disciplined and China Plus One reshapes Indian manufacturing, his anti-power-law thesis lands at the right moment.
👉Why Cactus Partners rejects the venture power law and underwrites growth risk instead of mortality risk, targeting consistent returns over unicorn bets
👉How the firm stayed 2x up by 2023 while peers nursed 50 to 70% drawdowns, by holding valuation discipline through the 2021 euphoria
👉What the 5 Ts framework (Team, TAM, Tech, Traction, Transaction) reveals about how a disciplined VC actually screens an early-growth deal
👉Why the "1.4 billion consumer" pitch is a trap and profitable consumer brands must target only the top 10% with the ability and intent to pay
👉How to read a B2B aggregator's real value through take rate, not inflated GMV, and why premium beverages drown in the cost of shipping water
Subscribe to Founder Thesis for weekly founder conversations and follow Akshay Datt on LinkedIn [https://www.linkedin.com/in/akshaydatt] for daily insights.
00:00 - What Qualifies Someone to Be a VC
02:35 - Buy Side vs Sell Side Explained
05:48 - Inside a Sports and Consumer Fund
08:45 - Why Premium Beverages Cannot Scale India
15:55 - The Consumer Thesis: Targeting India's Top 10%
18:11 - Why This VC Backs Asset-Heavy Manufacturing
25:43 - Avoiding Herd Instinct and AI Hype
28:43 - Underwriting Growth Risk, Not Mortality Risk
38:23 - The 5 Ts Framework for Picking Founders
42:23 - Why the Series A Funding Gap Exists
49:05 - The Anti-Power Law Investment Thesis
01:00 - Picks and Shovels: How to Invest in AI
#FounderThesis #AkshayDatt #RajeevKalambi #CactusPartners #IndiaVCFunding #VentureCapitalIndia #SeriesAFunding #IndianStartups #StartupFunding #PowerLaw #AntiPowerLaw #PicksAndShovels #ChinaPlusOne #IndiaManufacturing #ProductMarketFit #GMVvsTakeRate #VCInvestmentStrategy #HowVCsPickStartups #EarlyGrowthVC #startupvaluation
Disclaimer: The views expressed are those of the speaker, not necessarily the channel
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Transcript
Avoidance of Asset-Heavy Industries
00:00:00
Speaker
The best performers are manufacturing companies. Most VCs tend to avoid asset-heavy businesses, like say a manufacturer. If you're creating an AI product, you might be successful, you might not be successful, right? Most VC funds operate on the power law principle, which means that two out of 10 investments are so successful that they make up for all your bad investments.
Cactus Partners' Unique Investment Approach
00:00:19
Speaker
as Rajiv Kolambi talks about how he is running Cactus Partners on the anti-power law thesis, is skipping the AI gold rush, and actually invests in factories. we look at the top 10% of the population. Because the top 10% of the population has the ability and the intent to pay. What's an example of a success story of a company catering to the top 10% which has really broken out?
00:00:40
Speaker
If you try middle India, bottom India, you might be able to get some scale, but you will not be able to get profits. With the power of hindsight, would you have invested in raw price range?
Rajiv Kolambi's Professional Experience
00:00:56
Speaker
ah Rajiv Kalambi, welcome to the Founder Thesis Podcast. ah You are running the VC fund, Cactus Partners. My first question to you, um what makes you qualified to be a VC?
00:01:08
Speaker
I'm a startup founder. Why should i be pitching to you? Why should I be listening to your inputs on my business? Okay, so to get straight to the point, what qualifies me to be a venture capitalist is my experience.
00:01:24
Speaker
I have 26 years of experience across consulting, research, Investment banking, corporate banking, and on the buy side, sitting on the boards of companies and working closely with founders and helping them scale businesses.
Coaching and Mentoring Founders
00:01:39
Speaker
So all of this together sort of has given me a holistic um exposure and experience, which I think I can bring to the table.
00:01:50
Speaker
And when I meet with founders, i understand the kind of challenges that they are you know going through encountering and and how they could try and overcome the stumbling blocks.
00:02:04
Speaker
So there are always new things that even we see along the way. And we also learn from the founders, but at the same time, there are some things that just
Investment Banking and Corporate Banking Insights
00:02:12
Speaker
don't change, right? So in terms of how do you put systems in place, how do you put policies, stumbling blocks along the way, how do you try and resolve them? How do you troubleshoot?
00:02:22
Speaker
So all those sort of, let me call it coaching or mentoring is something that we bring to the table for you know young founders who looking to build their businesses. Yeah.
00:02:35
Speaker
ah You use the term buy side. A VC business is essentially a buy side business. If I'm not, what what what exactly does that mean? Buy side, sell side. These are all investment banking terms, right? yeah So sell side is when and you know a banker or an intermediary goes out and tries to raise money for you.
00:02:52
Speaker
The buy side is the people who are the custodians of, ah you know, investors' money to invest. So it could either be investing in debt or it could be investing in equity. But people are doing the investing are called the buy side.
00:03:06
Speaker
And the people who are assisting or helping, you know, founders to raise money are called the sell side because you're selling a stake in a company to an investor. So that's the sell side. And the investor is buying a stake in the company. So that's the buy side.
00:03:21
Speaker
Okay. And you've played both roles, if I'm not mistaken, sell side, buy side. Just give me a summary of what you did in sell side, what kind of businesses, and again, in buy side, what kind of businesses, what kind of check sizes, stuff like that. So on the buy side, I have been on both the debt and the equity side. So just to give a background, as a corporate banker, ah You are lending money to companies. right So as a lender, you are effectively buying into their business, right ah the debt side of things. So that's the buy side on the debt.
00:03:53
Speaker
On the equity side, as part of you know being part of a fund, you are ah buying into the equity stake on the cap table of a company. right So that's the ah buy side on both ends. On the sell side, i have been an investment banker with Edelweiss Capital, which is now renamed Nuwama. It's been while now. I used to be with them many moons ago.
00:04:16
Speaker
ah So you know we used to help companies raise private equity. We used to help them with structured finance. We used to help them go IPO. right And the same with another company called SMC, which was the largest retail broker in those days. And now, of course, everything has gone digital.
00:04:33
Speaker
But they used to have a a very large franchise operation in India. So they were doing a lot of work on the capital market side. So helping companies do the same thing. Basically, raise cap ah private equity, a structured finance and go public.
00:04:45
Speaker
These would be late stage companies. Yeah. So typically in those days, it used to be el late stage companies. But gradually, if you see the way my my career has moved, I started with debt in corporate banking after my MBA.
00:05:01
Speaker
And it started with large corporates when I was with HSBC. gradually moved to mid-sized corporates with HSBC and then with DBS Bank.
Career Transition to Private Equity
00:05:11
Speaker
ah So the go large corporates used to be MNCs in India.
00:05:14
Speaker
And gradually in those days, the the Indian economy was growing rapidly and banks, which were relatively risk averse, had started developing a little bit more of credit appetite. So they went to the middle markets.
00:05:27
Speaker
Now, with the middle markets, then I moved to the equity side where a lot of middle market companies wanted to raise capital and grow. right So that's when the sell side angle came in, but I was on the middle market side.
00:05:39
Speaker
Did that. And then when I joined the ah you know the fund industry, with you know my I moved from investment banking to the fund and but industry. We were doing investments in very early growth private equity funds.
00:05:55
Speaker
So this was a fund of funds? No, no, no. It was, ah sorry, in companies, but it was an early growth private equity fund. So they would, we did about what, six, seven investments in India, but I used to be based
Investments in Sports, Health, and Consumer Sectors
00:06:10
Speaker
in Dubai in those days. So I did one full fund cycle with a fund called Fidelis World and invested in India.
00:06:15
Speaker
And Fidelis is like, it has ah LPs from Middle East. From the Middle East. Correct. Okay. yeah LPs for my audience who's new to this world is limited partners, the people who give money to an investor like yourself. to as a So you are the custodian for LPs money, basically.
00:06:33
Speaker
Okay. And what what businesses did you invest in under Fidelis? So it used to be largely early growth in sectors that were in sports, health, fitness.
00:06:46
Speaker
So that was the focus area. Consumer. was a $100 million dollar fund, consumer-oriented, and largely in sports, health, fitness with three broad nations. Wasn't it too early to be doing consumer investing in India? Like consumer investing in India only now, I feel, is kind of paying off.
00:07:05
Speaker
True. it The focus on sports, health and fitness was early. Consumer was always there. Right. But it was a niche within a growing consumer segment. And the Western world has, you know, evolved, had evolved significantly at that point in time. So I was with Fidelis from 2015 to about 2021.
00:07:25
Speaker
to about two thousand twenty one And prior to that, you know the the Western world had a lot of investments in sports, right so clubs, leagues, ah you know sporting businesses, you know so stuff like that. In India, it was a little early, which is why the strategy there was not to invest in leagues and clubs, which were just about...
00:07:45
Speaker
sort of coming up. And in those days, there was only IPL, which was profitable, right? The others were, and and many of them are still struggling. and They're not making money. or Maybe the Kabad-D-League has reached some level, but I've not been tracking
Challenges and Strategies in Indian Market Investments
00:07:58
Speaker
that sector now. But, you know, in those days, so what our strategy was to work with the picks and shovels.
00:08:04
Speaker
So anything that is ancillary to sports, health, and fitness. So some of the investments we did were in companies which would, you know, in stadiums, they would put the LED boards.
00:08:15
Speaker
Okay. Right. and So you're providing infrastructure for that. Then we invested in a company which is the big data side of things, which covered some 20-odd sports globally, not just in India. Okay.
00:08:28
Speaker
And for example, when you nowadays Google, ah you know, ah some game going on, you want to know the score, that information was powered by this company. Okay. So stuff like that. We invested in the health side. We invested in a company called Raw Pressery, which is a cold press juices brand.
00:08:46
Speaker
Right. So stuff like that. So while we did why we do not really go into clubs and leagues, um and but But on the periphery of that, right? So so that that worked well because we needed to look at businesses that could continue growing in scale.
00:09:01
Speaker
But when you put money into a club or a league, it depends on how well they perform in that league in that year, you know, and the club performs in the league in that year. Sometimes you do well, sometimes you don't do well, and there are ups and downs. And ah you know private equity or venture capital requires one-way up, right? You don't want fluctuations. So so that's that's why the strategy focused a lot more on you know the ancillary and the infrastructure side of things.
00:09:30
Speaker
With the power of hindsight, would you have invested in raw press rate? Raw Pressery was a fantastic company and is still doing very well. So just to give you some background there, the challenge Raw Pressery faced was COVID.
00:09:45
Speaker
ah So, you know, they were growing rapidly. um They were doing very well. The product is fantastic. And we ended up having a cash crunch during the COVID period because no investors were looking to invest. They were sort of you know holding back their investments to so use their capital for their portfolio companies to support them during this difficult phase because people weren't sure how long this would last. right ah So at that point in time, the company needed to do raise.
00:10:18
Speaker
And then he laid capital. And it was so difficult at that point in time to get people to put in money that, you know, we decided to do an M&A transaction. Right. So it was acquired by WinGreens Farms.
00:10:29
Speaker
And in fact, today I'm told it is the, you know, the flag bearer for WinGreens Farms products. Wingreens went on to, they had their own bouquet of products.
00:10:41
Speaker
And after the Raw Pressery acquisition, they went on to acquire several other brands also to sort of create a sort of a bouquet, you know, like a breakfast bouquet, saying that, you know, healthy breakfast ah type of interest um brands across various categories.
00:10:56
Speaker
And Raw Pressery today is, I think, about 4x of the, ah you know, the revenues they were at when we sold them to Wingreens Farms. it Is India, you know, people say that premiumization is a trend and Indians are willing to spend more. But ah like in the beverage space, none of the premium beverage players, like say Hector Beverages or all of these, haven't reached meaningful scale. ah do you think that India is a market for premium beverages, you know, like 100 rupee for a bottle, a single serving bottle of juice?
00:11:34
Speaker
So if you're focusing only on beverages, I would say maybe it has not reached that stage. It's still a niche. Because if you look at India, you know there are some three or four Indias.
00:11:48
Speaker
right There's no one India. right A per capita income might be $2,800, $2,900. But the inequality is very, very wide. So effectively, and that's something we do at Cactus Partners also, when we look at consumer businesses, we look at the top 10% of the population.
00:12:05
Speaker
Because the top 10% of the population has the ability and the intent to pay. right The two things you have to see, there money or is there not a cost? So you there has to be the ability and the intent to pay. That you don't see maybe below the top 100 million. you know We are looking at 140, 150 million people by it saying 10%. But 100 million and below, ah it's very difficult. You don't have too much of disposable income. right Now, within that, if you're looking at only beverages, yes, it is a challenge.
00:12:36
Speaker
ah In fact, in one of our portfolio companies also, which started off with beverages, we have actually moved out of beverages and gone into other form factors.
00:12:47
Speaker
Sticking with, so for example, the portfolio company is called Auric. Auric started off with beverages and Ayurveda-based beverages. But, you know, we I shared my insights from, you know, Raw Pressery. The founder also sort of
Consumer Market Focus and Profitability
00:13:04
Speaker
learned the challenges there were with basically logistics costs associated with moving water, especially its beverages, just water with, you know, water.
00:13:14
Speaker
you know temperature control water. yeah tastee and stuff like that yeah It's like 95% is water. yeah water So you're you're transporting volumes of water across and the costs are too much and makes it very difficult for you to get your margins.
00:13:27
Speaker
So, you know, moved out of that because we realized that it's not very easy to build that on that. And we created other form factors like effervescent tablets and other things, right? So ah to answer your question, yes, I don't think premium ah drinks can be scaled in a mass way.
00:13:46
Speaker
There will always be niches and you will stick to those niches. And where a large niche is concerned, raw price is done fantastically well. Now, you mentioned Hector Beverages. I'm told Hector Beverages is actually moved away from the large pricing, ah you know the paper boat brand. to others, right? The swing brand, which is more mass market. It's mass market, right? Like a 10 rupees kind of a packet because, and not just that, you know, you have to also look at what India likes to consume.
00:14:15
Speaker
And the largest drink beverage consumed is mango juice. right ah You can try orange juice, you can try pineapple juice, you can try apple juice, everything. But mango works very well with India.
00:14:29
Speaker
And which is why that model has worked very well for hectare beverages. you know They they the sense that, they realize that you know that's where scale would come. And to go through distributors rather than to create your own distribution network. There are existing distributors who buy large quantums out of you and sell in tier 2, tier 3 towns also.
00:14:48
Speaker
So you have to worry about that distribution bid. You create the product, price it well, and the distributors take it off you and sell it. So that model works well. So to answer a question in a line, yes, premium beverages, scaling is definitely a challenge. What do you think of Lahori Zira?
00:15:05
Speaker
So I don't know much about the brand, frankly, ah because you know that is an area that you know I had decided to avoid. right I believe they've done fantastically.
00:15:17
Speaker
but Why did you decide to? You're saying mass market beverages is an area? Correct. So we we felt that there was a lot more opportunity in other spaces ah which are growing rapidly. I'm sure, you know, see, in every market, ah there are people, ah founders, who will be able to identify something that works. And maybe Lahori Jira will be one of those. ah But having said that, I would still think that it tends to be reasonably regional.
00:15:46
Speaker
To make it pan-India is very difficult because, see, ah like I said, there are three, four Indias economically, but you are aware that you know every 150 kilometers, the language changes, the taste preferences change, you know cultures change, everything, right? So, like, Jira as a ah you know product, like Jira water, which is acceptable and you know liked a lot in the North,
00:16:14
Speaker
is not enjoyed the South. And in South India, they would like coconut water, which does not get consumed as much in the North. So, you know taste preferences vary so and and it's so diverse you know ah across regions that it becomes very difficult to take certain product categories and make them a pan-India scalable product.
00:16:38
Speaker
So, in consumer space, what is your thesis? So, like I said, you know, our thesis is focusing on any business, right, that folk that is targeting the top 10% of the population, right? And that's where the premiumization comes in.
00:16:53
Speaker
You will see that in most business models today. um Like I said, the top 10% of the population has the ability and the intent to pay.
00:17:04
Speaker
And if you want to make a profitable business, that's where you've got to target. If you try middle India, bottom India, you might be able to get some scale, but you will not be able to get profits. It's and it's very difficult to make money there.
00:17:16
Speaker
What's an example of a success story of a company catering to the top 10% which has really broken out? there are There are several. So, for example, you look at the foods businesses, right? A lot of the foods businesses are now focusing on the top 10%. Because eating out startups, like... and So, look at Viva.
00:17:36
Speaker
Viva has done fantastically well, right? There are more masks. There more masks, of course. wouldn't be that yeah but but But if you see, most of the consumption would get ah will be done by the top 10% of the population.
00:17:48
Speaker
So, for example, one of their strategies is, you know, the small sachets, right? Of ketchup. Now, where does that go? It goes to people who purchase their food through Zomato, Swiggy and you know yeah stuff like that. So it's a top
Manufacturing and Fast Fashion Investments
00:18:04
Speaker
10%. So it does not have to be a direct TG.
00:18:06
Speaker
It could be an indirect TG. So which is why we are also looking at enablers, what we call enablers. So it could be, you know say, nor travel companies. We looked at one travel company which was targeting the Gen Z because the Gen Z today want to do four holidays a year or maybe even five if they can fit that in. They'll go for a week each. They'll take one one week, four, five days each and do four, five holidays in the year. right So there's so much more that you can get out of that. ah Then there are business models which are saying, okay, we are going to refurbish
00:18:40
Speaker
phones because, you know, a smartphone is something that not just the 10%, but, you know, everyone else wants now gradually. And so you're targeting business models like that. So there are several such that we look at.
00:18:54
Speaker
Anything that is an enabler. So one investment that we've done at Cactus Partners is a company which is in the manufacturing side, okay But they are manufacturers of apparel to the fast fashion industry, which is in the mass premium segment.
00:19:11
Speaker
So the likes of WeMart, Vishal Megamart, Zoodio, etc. The fast fashion side. that That fast fashion is growing so quickly, and at about 20-25% per annum. And the supply is not being able to keep up. So this company has created a business model which enables matching of supply to demand.
00:19:30
Speaker
It's asset light or does it have its own factories? They have their own factories. So so they have their own factory, they lease out full factories, and they aggregate unused capacity in the industry.
00:19:43
Speaker
Most VCs tend to avoid asset-heavy businesses like, say, a manufacturer. ah Why did you decide to back them? And in general, are you like bullish on asset-heavy businesses?
00:19:56
Speaker
So what we are bullish on are businesses that show secular growth opportunities. whether they're asset-like or whether they're asset-heavy or asset-medium, right?
00:20:07
Speaker
ah So for us, we were early investors in manufacturing. like In 2021, when you know investors were giving crazy valuations and you know there were all kinds of business models getting funded and all, we were looking at businesses that were in the manufacturing space, right? ah which tend to be reasonably capex heavy. But what we look at are a couple of things. One, what are the tailwinds for the industry?
00:20:36
Speaker
right So we see that the manufacturing industry today has massive tailwinds. there is a China plus one benefit that is coming our way. And two, the government is also very positive on that and is supporting the industry and saying, look, let's build our own capacities. And we have seen that you know our CapEx gross, you know,
00:21:00
Speaker
but private ah investments in ah um you know manufacturing and all has been stuck at something like in the between the 14 to 16% of GDP range. right And that is now gradually growing.
00:21:13
Speaker
um So we what we want to do is to ensure that we participate in that secular growth opportunity. And we have, in fact, in our portfolio at Cactus Partners, our best performers are manufacturing companies, right?
00:21:28
Speaker
ah Similarly, for this company in the apparel manufacturing space, now, one might say ah apparel manufacturing is a fuddy-duddy old world business, right? But what we are looking at is a differentiated business model.
00:21:42
Speaker
It is not that we will just put a factory laalethe and we will just put some sewing machines and we will just give it to someone. No. What they have done is they have mapped the supply chains across the country.
00:21:54
Speaker
They identify where the best yarn is made at the lowest cost. They source it from there. They send it to the next place where it gets dyed, third place where it gets woven into material. then what they're doing is building to scale. So for example, they'll make one factory which will make, say for example, only denims. There'll be one factory it will make only shirts.
00:22:16
Speaker
Designs would be different, but you're making one product. So you have economies of scale. They know how to sort of ah stitch it also to make sure, you know, your processes are standardized to a large extent.
00:22:27
Speaker
ah Then, for example, they are sort of not very asset heavy either because, like I said, they go and they aggregate unused capacity. So there are lots of plants out there. We we call it plants, but it's actually ah a fragmented industry where someone sets up a small factory and, you know, has, say, 50 sewing machines.
00:22:46
Speaker
out of that they're being able to use only 50% capacity. The remaining 50% is unused. So what they do is they go and they say, okay, you let us use this 50% capacity. We'll pay you you know a fixed amount for that.
00:22:59
Speaker
And you know they then meet the supply requirements of the large retailers. Right. so So it's a differentiated model where they don't need to spend on CapEx.
00:23:11
Speaker
They go and tie up with unused capacities and they have a system created, a training process for their people where they have someone who goes and monitors daily manufacturing processes at each of those separate locations. right so So that is what we look at. We look at something that is differentiated but should work. right In our minds, we do a lot of analysis. We do a lot of deep dives.
00:23:33
Speaker
We do a lot of reference checks before we finally decide to invest. So our conviction levels when we go into an investment should be very high. How did you find this business? It doesn't sound like the kind of business which would be actively going out to raise funds.
00:23:49
Speaker
So the founders right are highly dynamic. um You know, they had built a business in the furniture industry, which is another quote-unquote fuddy-duddy business, but they built it, ah took it to about a hundred crore top line, finally sold it off to some other buyer, right?
00:24:09
Speaker
And this is an area that they had found an opportunity and they wanted to build that. They had raised money from previous funds. So there was another fund called Jungle Ventures who they raised money from. So this company that we've invested in is called Showroom B2B. So they had Jungle Ventures and others. So they reached out to us because they saw our ah value proposition. right So just to tell you a little bit about what we do at Cactus Partners. So we ah wheat do per fund anything between 13 to 14 companies, investments in 13 to 14 companies. Why is that? Because we believe in walking the path with our founders.
00:24:48
Speaker
and hand-holding them in that growth journey. So there's a lot of value add that we like to contribute or build alongside the founders. And we've done that with most of our investments. That's one.
00:25:00
Speaker
And are my partner, Anurag, ah he is a highly successful entrepreneur. So he's been there and done that. you know He's created $100 million plus top-line company. He's got six offices globally in his previous business, which he stepped down and now we are doing cactus partners together. But, you know, he has those networks. He's done B2B, D2C.
00:25:21
Speaker
He's done M&A, strategic investments. Currently, the business is working on AI aspects of a lot of their offerings. So, you know, ah he brings in a lot of wealth of information, knowledge and operating chops to the table.
00:25:36
Speaker
And he spends a lot of time with the founders in the business scaling side of things. and Value add is something that we bring to the table. So I, you know, I, I believe, you know, they ah found out about us from the market, reached out to us. And that's when the conversation started. Then, you know, I knew the partner at Jungle Ventures. So we caught up.
00:25:56
Speaker
I told him, look, we are talking to one of your portfolio companies. We got his perspective on it. We did our own research. We delved into the business model.
Investment Discipline and Market Cycle Evaluation
00:26:04
Speaker
I have done lending to this industry as a banker earlier. So had enough knowledge on that. Plus my partner Amit, who leads investments for us, he did a fair bit of deep dive into the industry along with my principal.
00:26:19
Speaker
and And then finally, we took a call saying that, look, this is something that is promising. It's very differentiated. you know So ah what we would want to do is to ah try and do things which are not ah you know where there's no herd instinct. right There's no herding behavior. like There are lots of businesses. Today, if you hear AI, everybody is going towards AI. right But we are we are a little circumspect.
00:26:42
Speaker
we would want to study it a lot more, take a more concerted thought through view before we invest in AI, right? We already have two companies which are adopting and implementing AI in our portfolio. But, you know, it it doesn't mean that you just, you know, jump into it because that's the wave. You know, we have been through cycles since we started in 2021. 2021 was the year of euphoria,
00:27:08
Speaker
right ah people paid crazy valuations for various types of businesses. But by 2023, the markets had tanked significantly, right? And a lot of the businesses in that year, which had invested in that year, the investors were sitting on, you know, 50% drawdowns, 70% drawdowns on the valuation in that paid.
00:27:30
Speaker
But for us, because we had gone in with our eyes open into the businesses we invested in, Those were actually 2x up. So there was a sort of a divergence. We were 2x up while other valuations are falling by 2023. So we've invested in 2021, which was the euphoria year. We've invested in 2023 when the markets were down. We've continued through 24-25 when things have now come to a certain level of stability.
00:27:54
Speaker
And now, of course, there's another divergence where there's a sort of euphoria on ai And the rest of the businesses, you know, now people are saying, okay, what are you doing about AI? irrespective of what their current business models are. So you know we've we've seen three cycles within a short span of five years. right And we ah have ah we would like to think that we're a little disciplined in the way we go about evaluating businesses. We look at not just the you know the the the story behind the prospects.
00:28:27
Speaker
We ah sort of... test it. The hypothesis is tested before we invest. We do a lot of our own diligence. So people say things like, okay, the TAM for the industry is this much.
00:28:42
Speaker
We don't just go by an external you know publication which says we've done some conducted some research, even though if you know they they bring a lot of credibility to the table, but they say, okay, we think this is the TAM. We do our own bottom-up exercise to see, okay, realistically, what could be the TAM?
Series A Investment Strategy
00:28:59
Speaker
And is there a divergence? Is it very high, very large between the external publication and what numbers we have got or whether it is, you know, close by and and the external one can be considered to be relevant.
00:29:12
Speaker
So we do all that, you know, sort of analysis before we take a decision to invest in a company. Okay. I'm guessing compared to a pure early stage fund, ah the problems for you would be of a different flavor. Like early stage funds, the problems are you get thousands of ah pitches every month. How from those thousands, how do you find those 10 which are worth talking to? And out of those 10, maybe you invest in one. So you are early growth stage, which means that post-PMF, and I believe like Series A is when you would typically enter a business. So this itself is a smaller pool, like compared to companies at early stage or angel stage, by the time you come to Series series A, 90% of them would anyway have not managed to make the cut to reach Series A. So what ah what is the flavor of problems ah for companies
00:30:11
Speaker
this stage of investing, is it about building credibility with founders, building a personal brand so that you get more deep flow? Is it about ah being good at evaluation? Is it about being good at supporting? um you know Help me understand the flavor of problems that you face.
00:30:29
Speaker
Okay. So, you know, before I come to the flavor of problems, maybe what I can do is give you a little bit of background to, you know, very early stage, like you've covered a little bit and how we are trying to do things a little differently and what happens at our stage, right?
00:30:43
Speaker
So very early stage clearly is the zero to one space, right? Where you're experimenting, you're hustling, you're trying to create, ah a you know, a POC and trying to get to product market fit, right? So for that, the ah and the the challenges there are very different in the sense that over there you're trying to stay above water.
00:31:07
Speaker
right You're trying to survive. You're trying to get a product out to a customer. You're trying to get customers to give you revenues. right ah And you have to also, as a founder, you have to convince an investor that what you are building is something that ah makes sense for the customer to put money into.
00:31:28
Speaker
So a fund that invests at a very early stage is actually taking a call on the founder, the founder's ability to build and it's effectively a bet.
00:31:39
Speaker
right So that's why the term bets is used in the industry. Why? And your perforce, because of the nature of the you know exorbitant risk that you're taking at that stage, you have no option but to do what is called the power law.
00:31:56
Speaker
right The power law is basically, you know you know that 50% of your portfolio will die. right Companies will not be able to survive, will die. And 30% might give you some return, there might be some loss, there might not be full write-offs.
00:32:10
Speaker
But you're then depending on 20% of your portfolio to become Sunicorns, Unicorns and to give you your overall fund return. right There is no option but for you to play that ah you know game, if I may use the term, yeah at the early stage.
00:32:25
Speaker
We come in post-product market fit. right So for us, ah we are coming into companies that have some minimum revenue scale. right They have paying customers.
00:32:37
Speaker
They have ah maybe, and what we would like to see in that business is whether they have recurring customers. And we want to see that they have maybe industry-beating gross margins. Because only if you have high gross margins will you be able to become profitable along the way. So when we invest, while we when we say early growth, we use the term early growth, many of our investments are in companies that might be EBITDA negative. negative So it's not, I mean, private equity would invest only in, which is later stage, would invest in EBITDA positive companies. So we invest
00:33:10
Speaker
are okay with coming into companies which are EBITDA negative, but that will execute and grow the business. And by virtue of the high gross margins, we know that they'll become EBITDA positive as they continue scaling.
00:33:22
Speaker
So it's profitable growth. right So we're investing in businesses that can grow profitably. So the challenge we face, so we are basically underwriting growth risk.
00:33:34
Speaker
we are not taking mortality risk, right? So ideally, if you have, you know, revenues and some recurrence in your revenues, recurring revenues and stuff, and that chances are that you, you might not close down, right? Your biggest, ah you know, concern is will you not be able to scale, right? So the, uh,
00:33:57
Speaker
ah The considerations there are more around your go-to market. How do you scale your business? It's more about how do you ensure that you maintain your profitability while you're growing.
00:34:13
Speaker
ah It's about also putting systems, processes and policies in place to enable the scaling. Because quite often we see that, you know, you rush to get customers and clients, but if you don't have your back end sorted, ah customer experience gets hit, you know, ah and maybe the system cannot deliver to the promises that the sales is making to the customer and so on, right? So there are disconnects. You want to make sure that there's a concept of fit in the organization, that the departments are all aligned.
00:34:44
Speaker
And are working with each other seamlessly to ensure that the final product that goes to a customer ah meets with and ensures, you know, customer satisfaction.
00:34:54
Speaker
Not just satisfaction, but, you know, excellence. You know, they should be very, very happy with the product. Because only then will they buy your product again and will pay you a price when they see the value that gives you a gross margin.
00:35:07
Speaker
right so So it's mostly around um you know strategy. So a lot of the work that Anurag, my partner, does with our portfolio companies on scaling is around strategy.
00:35:20
Speaker
It's around ah you know your organization design. How do you structure your organization? How do you find the right people for the right jobs? How do you think through their skill sets and how applicable or relevant it is for the role?
00:35:33
Speaker
All of that. And the third is international expansion, if that is a requirement of the business. And the fourth is putting governance in place, systems, processes, policies, etc.
00:35:44
Speaker
So, you know, a lot of our effort goes into those elements. Whereas at a very early stage, the considerations would be very different, right? A lot of the time would typically go into helping a founder because most founders know their product.
00:36:03
Speaker
right they know what they're looking to sell now one hopes that that is aligned to customer needs because quite often we say you know what is the problem that you've been solving and all we've seen in several cases a lot of these problems are ah you know made in your own mind.
00:36:20
Speaker
They're really not a problem with the customer. kind The customer quite often doesn't consider it to be a problem, which is why products then are not purchased and the business fails. right So one hopes that the product customer sort of fit is there.
00:36:36
Speaker
And all you require then is access. And so a lot of the early stage investors ah work with their ah portfolio founders to open doors for them, to give them access, to get them the initial breakthroughs. So so the nature of the challenges is very different across both.
00:36:54
Speaker
ah How does this affect your selection behavior versus early stage selection behavior terms of selecting which deals you want to back or which founders you want to back? So, you know, some things will not be different in the sense that the founders have to be stellar, and exceptional. We like to see that the founders who are building have relevant experience in that space. um So it's important that you've done something in that space, which you had learnings from, which you are bringing to this business. Right?
00:37:28
Speaker
That's one. And there are a lot of softer aspects that we see, you know, whether the founders have displayed their execution abilities, that's one. to Do they have the the ability to build a team, a second layer and a wider team? Do they have what it takes to attract manpower?
00:37:49
Speaker
right and talent right so some softer aspects of that the third of course is you know as they grow do they have what it takes to engage with investors right and the future investors who are likely to come into the business right and do they know how to speak the language and that also of course they also develop along the way but do they notice know how to speak the language that investors want to hear And you also know the language that a customer needs to hear. right So you have to have that ability to you know switch from one to the other right and create that
00:38:24
Speaker
ah you know the background or or but let an investor know exactly what you're doing, which makes your business valuable.
00:38:35
Speaker
And that also has to show up in numbers. So you've got to execute. So the execution ability is something. So when we come in, they've already got some minimum revenue scale. So we can always look at what they've achieved, how fast that has grown, how they have delivered that. And that plays into one of the various elements of you know our evaluation of the founders. the founders have to be stellar.
00:38:58
Speaker
So, you know, internally, we typically, when we look at a deal, we look at what we call internally the five T's framework, right? So one is the team. So it's not just the founder, but the rest of the team, right? So team.
00:39:11
Speaker
The second thing we look at is that the TAM, right? So how large is the opportunity? And we do our own groundwork, like I said earlier, that, you know, we do our ground up TAM evaluation. um We also like to see if The founder is great, okay but is trying to build something in or an industry or a sector which has significant headwinds.
00:39:42
Speaker
great Or is the founder above good? Maybe not exceptional, but he's good and the sector has the significant tailwinds.
00:39:56
Speaker
So that evaluation also is something that we take into account to take a call on whether that combination is a good one or not. So the team, the TAM, the tech.
00:40:08
Speaker
So how important is technology in ah you know what the business requires and how is the founder thinking about technology, application of technology, utilization of technology or actually building the technology ah And does that make sense? right Does it make sense to build it internally or to use it from um external sources? right we see that you know we've We've seen a lot of businesses where initially they used to outsource it, but then I've decided, no, no, we are going to do it internally ourselves. So the question then is, do you really have the core competence to build it yourself?
00:40:42
Speaker
Is it a distraction? Should you get it done from outside? Is it readily available? Or is it something that is so differentiated that only you need to build it? So those factors we take into account in the technology, right?
00:40:54
Speaker
So team, TAM, tech, Traction. Traction is the, you know, your track record. How much have you built in terms of your revenue, or profitability, you know, all of that stuff. So tre traction is the ah the fourth thing. And the fifth is transaction. When we say transaction, we believe that every business is good at a certain price, right? So, you know, if the business is looking really good, but the valuation expectation is out of whack, right?
00:41:22
Speaker
we'd be happy to not participate. Because see, if it's critical that if you really want to make a return on your good return on your investment, your entry valuation has to be a reasonable number.
00:41:34
Speaker
Our portfolio today is doing very well because even during the you know euphoria of 2021, we paid very reasonable valuations. We did not pay through crazy numbers like a lot of you know peers did in the industry and are struggling with many portfolio companies there. So that has worked well for us. And we believe that ah you know the entry valuation is critical.
00:41:57
Speaker
And, you know, we also sort of have that conversation and see, founders will always want a very high value, right? You have to build that rapport with them ah and, you know explain to them what is a reasonable valuation by showing them peer comps and comparables.
00:42:16
Speaker
And not just that to say that, okay, are you looking at only getting in money or are you also looking at bringing in value add? Because what we are bringing in is we're going to give you a reasonable, fair price for your ah you know business. But at the same time, there's a lot of value that we can you know add to the business along the way.
00:42:35
Speaker
So you know that negotiation then sort of has to settle at a valuation for the business, which works for us. If it does, yes, it's great. you know We go in. If not, we are happy to say, okay, shake hands and say, you know wish you all the best you know because this doesn't make sense for us at this price.
00:42:53
Speaker
so So these five things is what we typically look at before we go into a business. So I think part of the reason why you are able to enter at the right valuation, I feel like the thesis you have is not a very crowded market. For example, you are not chasing AI businesses where you would have a lot of competition for deals.
00:43:16
Speaker
um You're coming in at Series A. I don't think India has too many like focused Series A investors. They're either early stage or they're like Series B. In between, there is that gap there definitely.
00:43:29
Speaker
um Do you not... ah worry that this ah this space has less competition for a reason.
00:43:41
Speaker
I mean, you know, like they say, if you're operating in a space where you have no competition, then you need to think twice that maybe there's a reason why there is no competition here. Does that cross your mind? So, yes. So when we started the Cactus Partners and we wanted to see how we could be different, right?
00:43:57
Speaker
You don't want to be one of many, right? You want to find some differentiation. And that is when we did a fair bit of data crunching because a lot of our decisions are data backed, right? Not a lot. Almost all decisions as far as possible are data backed. either with hard data or with some softer aspects, which sort of add to the hard data that's available.
00:44:19
Speaker
And we exactly like you pointed out, we saw that, you know, there's a very, very large ah focus on the bottom of the pyramid, which is your pre-seed, seed up to pre-series A. There are several funds that,
00:44:32
Speaker
There will, of course, be several companies that would get, you know, started. But as you're aware, 90% of them will not. High mortality rate. Yeah, high mortality rates. But the number of funds which are looking at deals in that space are also several. Yeah.
00:44:50
Speaker
the bigger challenge we saw is that funds which are getting and, and that there are, you know, funds which are at the series beyond series B, say C, D, E, there are very large funds who are, you know, waiting for some of these companies to come close to, you know,
00:45:08
Speaker
500 million is nothing nowadays, but, you know, one would say 800 million to a billion plus, right, in terms of valuation, for them to then come in with a reasonably large check, which gives them a decent stake in the company, right?
00:45:20
Speaker
But how many companies actually, you know, the ah get to that stage, right? If you're looking at a pyramid, the pyramid could be a sharp one, but in the one we are talking about is actually a very broad one like this with a low... So there are lots at the bottom and there are very few at the top. So the middle layer is where we felt we could add a lot of value and play because exactly like you pointed out, we feel that the numbers also showed that there are not too many Series A deals coming in where where it's the first check.
00:45:49
Speaker
but So we come in as the first check investor at Series A. Yes, there will be others who you know invest at the same level and then they will back their winners. So when the winners are doing a C-Day, they might either lead the round or get someone else to lead the round, but they will you know double down.
00:46:05
Speaker
Yeah, most of the well-known funds are backing the winners. Like they come in early stage and back the winners. Yeah, yeah. So, but we are the we come in at the Series A stage, right? And what we also felt and it's sort of playing out is that There are several businesses in India which have not raised money earlier, where the founders have built, bootstrapped the business and taken it up to a reasonably decent level, after which they are now looking to raise their first round of institutional capital.
00:46:39
Speaker
So in many of our portfolio companies, we are the first institutional check in that company. right ah There are also deals that we're looking at which you know have matured from the early stage, have come up to a Series A stage where we can now consider investing in it.
00:46:58
Speaker
But there again, what happens is that you know we tend to be highly selective because we're going to do only about fourteen fifteen companies. So it's important for us to make sure that all the companies that are quote unquote maturing and getting to a series A meet with our financial metrics that work for us.
00:47:17
Speaker
And so that makes it a little selective for, you know, the ah companies which are growing. They need to bring in the profitability angle, which I think is happening today. It wasn't happening in 2021, 2022, 2023. But now, gradually, I think most funds have learned from the challenges they faced in 21, 22, 23. And you will see the the term you know product market fit being used a lot.
00:47:41
Speaker
People are saying, no, no, we want some profitable growth. Path to profitability. Path to profitability. And all of that is now gradually that pragmatism is coming into play right now.
00:47:52
Speaker
But ah do you not worry that you'll... miss ai deals for example ah because you would be a little more hung up about valuation so think about what our goal is right our goal is to give our investors a certain return right our goal is not to chase uh multi-baggers So when we construct our portfolio, we would like to create a portfolio which, you know, in a worst case scenario, let's say, you know, out of four, let's say simplicity, 15 companies, right?
00:48:31
Speaker
Let's say three to four of them will not go to plan. But there again, we want to ensure that there's no mortality. So we should be able to get at least a one and a half, two X on that investment.
00:48:43
Speaker
Let's say 15 18% IRR over right? That's the, let's say, three to four companies, right? Then there is this hard middle of seven, eight companies, right?
00:48:55
Speaker
Which ideally should give us between a four to six X. And then we've got, you know, the ah outstanding performers, outliers. So maybe say another three or four of them who will give us, you know, ah any number. It could be on an average, anything between say an eight X to ah you know, to 10, 12, 15 X, right?
00:49:15
Speaker
So on the whole, if you're looking at the kind of returns we're giving, if we achieve this, we are meeting our numbers, right? What um we need what we need to give our investors. we We don't need to take inordinate amount of risk to try and chase multi-baggers, which might or might not become become
Approach to AI and Asset Light Businesses
00:49:33
Speaker
multi-baggers. So we are not in that, you know, zero one kind of... You're not playing the power law game, basically. This is anti-power law investment. invest you want more consistency in the returns from our, you know, investments. So that that's one. And so think of us as like a bridge between the power law and the private equity.
00:49:55
Speaker
Right? This is a stage where we feel that there's a fair bit of, you know, strong scaling with profits. Right? that happens. And if I may add one more element there, see, you know, we have to do 14, 15 companies at best, right?
00:50:09
Speaker
We believe that we are likely to miss out on several great opportunities. Right? right for various reasons. that It could be the risk appetite. It could be the valuation. you know It could be that maybe because we were not looking at that sector, we missed out opportunities. It could be various reasons for it.
00:50:26
Speaker
But the point remains that ah we will miss 50, 100 of them, but we have to do 15. We need to make sure that these 15 give us the returns that we need to give to our investors.
00:50:40
Speaker
You mentioned previously about the question for companies on whether they should build the tech in-house versus they should use tech which is like available through an API or things like that, which I think essentially is the challenge in front of most AI businesses. i'm I'm wondering if you have a take on that, like I know AI is not like your primary focus area, but do you have a take on, you know, there are some businesses which are called AI wrappers, but AI wrappers also have seen a pretty good growth of valuation, etc. What's your take on the AI space opportunities to invest there, especially within India?
00:51:17
Speaker
So, you know, we believe AI is here to stay, right? ah There is, of course, Gen AI. There's a fair bit of a work happening across various aspects of creating and deploying AI, right?
00:51:33
Speaker
ah We like to keep our eyes and ears open. We are not very married to a specific thesis and we would like to see how the space evolves. right So for us, when we're looking at any business,
00:51:51
Speaker
we would like to see if AI could potentially disrupt it. And if it can, is the founder conscious of it, um you know acknowledges that potential risk and is doing something about it?
00:52:07
Speaker
right and is adapting ah to it, to the changing times and adopting it into um their operations. right So that is something that we very closely take a look at when we are evaluating businesses.
00:52:22
Speaker
What's an example here of where a problem statement can only be solved with AI and therefore you would back an AI business there? So, for example, we had an investment in a company called Capture CX.
00:52:35
Speaker
Now, Capture is focuses on the customer experience management side of the CRM business, right? So, what they would do is for the in a back office where you have agents, right?
00:52:49
Speaker
Agents used to have dashboards. So whenever a call came in from a customer saying that, look, I'm having a certain problem, the information would get thrown up on the dashboard for the agent to troubleshoot and provide us resolution to the problem.
00:53:04
Speaker
Now, that actually he was doing fantastically well. But then AI came in, right? And with AI came in voice bots, chat bots, agent tick, know, processes and stuff like that.
00:53:15
Speaker
So the the team at Capture was very conscious about it. They were tracking the developments over there and they were they kept abreast of the developments right and adopted it immediately and started offering those services or the products to the customers.
00:53:35
Speaker
So customers who earlier used to have maybe just an email solution coming in, or you know a call coming in, gradually started adding you know your chat bot. you know If someone calls in the voice bots, stuff like that. So you know that that integration immediately into the processes of your customers has helped the company. And today, I think what 35% to 40% of the revenues is from AI. This is one example. We have another company called Intangles.
00:54:10
Speaker
which is in the telematics space, which which is used for preventive maintenance of ah fleets. So logistics fleets. right it But essentially, the product is such that it can be used for any engine.
00:54:25
Speaker
right So what they have is a device. which is put into the which is plugged into the ICE engine of you know trucks and buses and lorries and stuff like that.
00:54:37
Speaker
And there is a command center where they use AI to map the performance of some 200 plus parts of an ICE engine. right And they know that a certain part needs to function within a certain range of its parameters. So they know that if it starts if the parameters start showing something going beyond the range on the higher end,
00:55:02
Speaker
ah you know what could be the cascading effect on the rest of the engine, which could potentially lead to a certain negative outcome. right or if it's below, then there could be a completely different sort of cascading effect. so And that leads to an engine shutdown or a breakdown, right?
00:55:19
Speaker
And that leads to losses. So the preventive maintenance side of things sends a message to the driver of the vehicle to say that, look, this is likely to happen. So at the next stop, please, you know, resolve it, see to it, you know, see what you need to do. And the solution is also presented to them saying, okay, do this.
00:55:39
Speaker
If it is something that they anticipate is likely to happen the next 4 days, 7 days, whatever, the fleet manager is informed and told that this vehicle, you know, you need to ah do the preemptive maintenance of this part, either replace it or repair it or whatever so that, you know, the functioning does not get impacted. So that preemptive maintenance saves a lot of money for the customer.
00:56:01
Speaker
And there's a clear value add over there, right? Using AI. So what they're doing is they're using AI and applying it to physics, right? So a clear use case for that, right? So we try to look at businesses which try and bring in, you know, application-oriented use cases using AI in, in you know, day-to-day lives.
00:56:21
Speaker
Yeah, yeah. Essentially, what I understand is that... You would be bullish on companies using AI at the orchestration layer. Not exactly a company which is like an AI lab attempting to build a language model or whatever from the ground up is not what you're looking at. But you want to be closer to the customers, which means orchestration layer companies which are applying AI over there. okay So one way to think of how we look at businesses is the picks and shovel strategy.
00:56:52
Speaker
So we prefer the picks and shovel strategy to the gold prospecting one. yeah f Because the gold prospecting one is binary. right So if you're creating an AI product, you might be successful, you might not be successful. And the one thing that we've seen is that ah you know the the large names, the big ones, they become stronger and stronger.
00:57:16
Speaker
So it becomes very difficult for an insurgent to come and ah create a slightly differentiated positioning for itself and which helps them to then you know be the David to the Goliaths. right Here, what we are looking at is, okay, let's the others do what they have to do.
00:57:33
Speaker
We are going to see the application of that technology to the real world and see how companies can use it. Stay, you know, abreast of developments happening, ah you know, which is being developed by the big tech guys and, you know, create business models that generate revenues for you and profits. Right.
00:57:55
Speaker
I want to get your take on a very India-specific kind of a business model a lot of startups have. um See, like in more organized markets, ah the B2B supply chain, there are large players operating in those spaces.
00:58:11
Speaker
Like, say, if it was about, say, delivering meat, you would have a company in the US which would have their own avatar and directly do the processing, etc. Whereas in India, the large players are aggregators.
00:58:24
Speaker
like like say Captain Fresh or Fresh to Home, these would be aggregating, working with multiple people who have assets and they would have an asset light approach or same thing in say showroom B2B.
00:58:34
Speaker
ah You have competitors like say Groyo, Fashenza, Zillingo was also like, those now there are problems there. But essentially these companies are saying that India has a lot of SME manufacturers who are inefficient. I will build a tech layer on top and make them, ah give them more efficiency thanks to my tech layer. And I will aggregate demand on the one side and I will match it up with these millions of manufacturers. And this is across multiple spaces. Fashion is just one example, but I think even and an off business would be something like this. Or there are lots of such examples of people. Zetwork. Yeah, Zetwork, exactly. Yeah.
00:59:11
Speaker
Asset light manufacturing, building a tech layer. What's your take on that? Because you've invested, you've slightly gone counter to that thesis with the showroom B2B investment. which has its own factory. ah So i'm I'm just wondering that do you feel that is the way to go or are you also equally bullish on the other approach of asset light aggregator kind of an approach?
00:59:31
Speaker
That's not an easy one. So the way we look at it is that how key are you in the supply chain?
00:59:43
Speaker
How critical is your presence in the supply chain? So it's important. That is an element that we sort of try to evaluate. There is definitely ah a role for the likes of Off-Business, Zetworks and all of these because very clearly, I mean, India has a very large MSME mark, like 6 lakh plus MSMEs in the country.
01:00:02
Speaker
And many of them know manufacturing. They don't know how to go and get business. They don't know how to market themselves. right ah They might know how to build a product, but they might not know how to build it and maintain quality along the way. right So these intermediaries play a big role in map mapping and matching demand and supply.
01:00:26
Speaker
right And making sure that they get these MSMEs to start meeting certain quality norms that are required to improve the overall final product quality right and putting the supply chain in place. So there's definitely a role for them to play. The question is, how do you value them?
01:00:46
Speaker
So the biggest challenge has been that, you know, for us, it's the business are good. Valuation is so you have to distinguish between the business and the valuation, right? So we believe that a lot of these, if you look at, there are two models here, right? So in this aggregation play, ah you can either say the custom, ah the vendor will manufacture and bill it directly to the client and you get a,
01:01:13
Speaker
cut, your percentage cut, right? Your take rate, what they call a take rate, right? And your take rate tends to be 5%, 6%, right? So that's that's effectively your revenue, right?
01:01:25
Speaker
You are providing a service, you're creating value and you are getting a certain, you know, but revenues for it and you have your costs associated with it. So we would like to look at your take rate and your unit economics and give you a valuation on that, right?
01:01:41
Speaker
But I think historically, the valuation has been given to the revenues generated by the throughput rather than the... half Okay. they create that these GMV... GMV is... Okay. So, you know, so that...
01:01:58
Speaker
I think there has been a little bit of a disconnect there where you know we we sense and see that you know there's a lot of maybe valuation that is offered, which we might not agree with that methodology of valuing a company.
01:02:13
Speaker
Then there are others where what they will do is they'll say that, okay, we will pass it through our balance sheet. to show a higher ah revenue. yeah So, you know, I will go to some 20, 30, 50, 100 vendors. I will get them to, I will i will purchase a product from them and then I will sell it to the client.
01:02:32
Speaker
I think this is what Zetwork can all do. yeah ah Ostensibly, you know, they have control over the quality. through that process and maybe that's great. But at the end of the day, again, will still reflect in your P&L, right? Because you will buy it from them at a certain cost and you will sell it to the customer at a certain cost. The question is, okay, what is your margin that you're making over there?
01:02:54
Speaker
So we will evaluate that. right So there are no good or bads here or what is right or wrong here. It's about the business model. To see what is the business model and are you able to get something better than what the industry typically gets.
01:03:11
Speaker
vi text And that indicates your value add. Like I said, your margins are an indication of what a customer is willing to pay you for the services you
Recruiting Tech Space Challenges
01:03:20
Speaker
are providing. thanks so So that is critical for us when we are evaluating a business.
01:03:26
Speaker
I've heard early stage investors say that great founders find their own TAM. ah You know, they believe in betting on the team, not the TAM.
01:03:40
Speaker
What is your ah take on that? of So, okay, I think that belief system also ties in a little bit with the stage at which they invest And it typically happens at the early stage.
01:03:55
Speaker
ah We would prefer a combination of the two. right So, for example, I touched upon this a little while earlier. Would you like to back a great founder who's trying to build something in a a really difficult industry.
01:04:13
Speaker
Let's say it's it's a commoditized industry. Let's say there's a lot of regulatory overhang and he finds a niche, he or she finds a niche in it and says, look, I'm going to build it because I've identified a niche and you know I will create the TAM in it.
01:04:28
Speaker
Now, do you want to invest in a company like that? Or are you okay with investing in let's say, you know, AI, AI is doing this crazy tailwinds over there. Right.
01:04:40
Speaker
And we find a founder who understands AI, who's done it before and is, you know, is great at it. But maybe if I had to look at him compared to that other founder, I'd say, okay, he's good.
01:04:52
Speaker
He's not as great as that other founder who has already done two different businesses and exited it and made money. So, you know, which one would you invest in? Our preference would be to invest in the latter, where we say, okay, he's good, but he gets though the tailwind or the support of an industry which is growing organically and growing its time.
01:05:18
Speaker
Whereas here, the odds are... Stacked against. Maybe they're stacked against you. they might They might be surmountable, not insurmountable, but there's a lot of headwind and you're trying to change the structure of an industry, which ah is probably you know a challenge you're taking on, which will require you to put in significantly more effort to get the kind of returns that you're expecting compared to the good founder. who will get automatic, you know, support and tailwinds, which will help him grow a lot faster, him ah help grow a lot faster.
01:05:55
Speaker
So, you know, that's that's how we would look at it. What do you think of the recruiting tech space? You know, I've and not seen a breakout business there. Like UpNow would be the only one, but UpNow also now seems to be voice agents, like like more of ah that kind of a business rather than a pure recruiting tech. Is that a business that you think there are opportunities for breakout companies? Or is it like the knockers and LinkedIn's of the world have have it covered and Yeah, and I mean, um I would like to think that, um I mean, we've looked at several. When we started in 2021, 21, 22, 2 years, we looked at several such companies, but we just felt that there was no real differentiation.
01:06:35
Speaker
It's effectively the same thing everyone is doing. In fact, quite often what one would do is they would create the technology stack, get a couple of clients, start doing their payrolls, start doing certain aspects of HR management. But invariably they would go back towards the NBFC side of things and say, okay, let me give you a loan because I know ah your salary situation and I know your are the ability to repay and whatever. So let me give you small ticket loans and grow on that. right So we saw that model happen a lot.
01:07:12
Speaker
um and And there are several players out there. um Some of them who have scaled reasonably well, but um they necessarily need to move out of India also. right So they need to grow internationally and that's what they are doing.
01:07:26
Speaker
But for us, we felt that there was no real clear differentiation. So for us to take a chance with some of these, mean, see, what is the struggle that we face? It could turn out to be a lifestyle business.
01:07:40
Speaker
right it might not be It might not scale the way we anticipated. It will reach a certain level and tend to stagnate. right So when we look at businesses, we try to see, okay, is it somewhat differentiated? Will they be able to create scale?
01:07:53
Speaker
right And what does it take to create scale? And ah Could it just sort of reach a lifestyle business level? So we felt that a lot of these businesses, um so while you might see a couple of breakouts, like you know a great HR has done quite well and a couple of others have done well, but you just have to be lucky, right? We could have done an investment in some space and you know nothing could have come of it.
01:08:19
Speaker
you know so we So when we are looking at it, we look at the industry structure also and see, you know, what are the opportunities over there and what are the tailwinds over there, all of that. Okay. ah My last question to you, what's the best way for people to reach out to you, get your attention?
01:08:35
Speaker
So we are early growth, right? So it doesn't make sense to sort of reach out to us if you're at a zero to one stage, right?
01:08:46
Speaker
um Reach out to us or, you know, we we have a section on the website where you can come in and you know ah put in a little bit about yourself and your business. and you know There is an investment team colleague who match matches, looks at it every day. Do those website leads ever lead to an actual investment?
01:09:06
Speaker
arms I don't think we've had any so far. Right. Which is what most VCs have told me. Yes. But the one example I gave you is that the ah founders reached out to us on LinkedIn.
01:09:20
Speaker
Not through the website, but through LinkedIn. And then they gave us a little bit of a brief and then said, yeah, okay, this looks good. So we said, okay. So we also have our own Cactus page catti partners page on LinkedIn. So we occasionally receive some hits over there.
01:09:37
Speaker
But so far, we've not seen any other other than this one example. Okay. Okay. And other than that, I guess introductions, that's what would work. Warm leads introductions is is what works best.
01:09:48
Speaker
Okay. Awesome. Thank you so much for your time, Rajiv. It was a real pleasure. Thank you. Thank you so much for having me. This is very interesting. And I hope a lot of what I've shared has been helpful to your viewers. And I'm sure you you reach out to a lot of founders. And I hope some of what I've shared has been insightful for them.