The next decade for Indian Tech VC investing
I wrote a guest column for Mint’s 10th anniversary edition. Reproducing the same here.
Sequoia, like Mint, completed 10 years in India recently. A decade is a long time. Long enough, perhaps, to look beyond the vagaries of short-term investment sentiment. In the last four years, there have been swings in expectations on how India’s technology story will unfold. 2014 and 2015 were characterised by much optimism, strong capital flows, exuberance in valuations and extravagance in company building. 2016 was a year in which companies strengthened their business foundations. But it was also a year of uncertainty and diminished expectations in the community.
Clouded by such recent history, we often under-appreciate the changes that have taken place over the last decade and underestimate ones which could pan out over the next one. Compare 2006 to 2016 — and you would realize that we have come a long way, both as an economy and as a tech ecosystem. A decade ago, Indian companies had a market perhaps half to one-thirtieth of the current one, depending on the sector. Venture capital was scarce and only those with inherited wealth were able to start businesses requiring capital. Even till 2010–11, when I founded a company, few people had Internet, even fewer had smartphones and there was no easy way of distributing technology to consumers.
What a transformation a decade can unleash. Now, project the growth of the past decade on the next one and the market will be strikingly larger and more attractive for entrepreneurs starting businesses today. At Sequoia, we are excited about helping build technology companies which will serve this market across sectors. We are also hopeful that a few trends will pan out over the next decade
Businesses will be built with better capital efficiency
In recent times, Indian tech start-ups have taken significant capital to build businesses. The biggest eight Indian private Internet companies have raised over $8 billion (around Rs55,000 crore) between them. We believe this will change going forward. Companies of the last decade found an ecosystem where they had to do much on their own. For e-commerce companies, this included their own warehousing, logistics and payments. There were no quality partners. Often, supply quality was poor, so marketplaces had to be “full stack” to provide a good customer experience. We also saw exceptional competitive intensity, fuelled in some cases by an oversupply of capital and in others by the entry of global players. This increased customer acquisition costs.
The partner ecosystem is far better now, the base supply is improving and, as more differentiated business models emerge, competitive intensity and oversupply of capital is reducing. We are already seeing examples of this — Voonik, for instance, took far less capital than Myntra did to build a similar-sized fashion marketplace, thanks to a lighter operating model and outsourced logistics. With these, and the efficacy of engineering, product and sales teams going up with a maturing employee base, companies of the next decade should be more capital-efficient.
Newer business models will emerge in existing categories
Often entrepreneurs consider a category out of bounds for new businesses because of the presence of an incumbent. We think that a category is never “taken” and there is always scope for a new player to disrupt existing ones with a superior operating model. For instance, the C2C product commerce space has well-funded and large incumbents such as Quikr and Olx. But Zefo was still able to break into this market by providing a superior customer experience with a different operating model and instilling trust between the buyer and the seller. We expect more of this to happen in the coming decade.
More and more sectors of the indian economy will be rebuilt by tech companies
As a start-up ecosystem, we are playing in a canvas that covers a small fraction of India’s gross domestic product (GDP). Increasingly, we meet tech start-ups solving problems in sectors considered conventionally unattractive for venture investors. For instance, media, logistics and warehousing. Several sectors have incumbents which have done a poor job of customer service. Over time, most of them would become addressable to tech entrepreneurs and new companies will be built with a tech core, superior customer focus and stronger management. If you are an entrepreneur starting a business today, what’s up for grabs is not just the digital market but the next decade’s $5 trillion Indian economy.
With larger and more accessible markets, improving capital efficiency, more sectors of the economy becoming addressable and companies increasingly going after global markets, each year of tech investing in India looks incrementally better. At Sequoia, we wake up every morning excited about the future, and about partnering with entrepreneurs who will shape it.
Disclaimer: Sequoia funds are investors in Voonik and Zefo.
