To catch them early, Sequoia Capital India, which has backed startups including Zomato, Oyo, Byju’s, among hundred others, has racked up $195 million for its second seed fund, in addition to the $1.35 billion corpus it raised for India and Southeast Asia in July last year. ET spoke to Shailendra Singh and Rajan Anandan, managing directors, Sequoia Capital India and co-leads of the fund’s Surge accelerator programme, on the heightened deal activity, rising valuations at seed stages and why Indian startups are charting a path to IPO. Edited excerpts:
It has been an extremely busy year for venture capital investing despite the Covid-19 outbreak, with frenetic deal-making especially at early stages. What’s different now from the earlier boom cycles?
Shailendra Singh: The pandemic has pulled forward a few years of tech adoption in tier 2-3 India. Companies are scaling users and revenues extremely rapidly and the financing market reflects that. It’s a globally buoyant financing market for technology. For India, two factors have culminated together — markets deepening and tech adoption being advanced. We’ve seen these cycles before and this is definitely one of the bull cycles, but I’d say this has more fundamentally strong companies than any prior cycle. We hope many founders will build sensibly and for the long term.
It’s been a year since Sequoia issued its famous memo warning founders of Covid-19 being a black Swan event, but things turned out differently for many tech companies. And recently the firm put out another, more optimistic note.
SS: It’s interesting when we wrote that memo, the global Covid-19 case count was less than 100,000. We were seeing serious dark clouds of the pandemic which has indeed played out in different ways for different industries. And especially in places like India, where the lockdown was very severe. It was a very rough phase for the next several months, where startups were focused on survival, and on improving their businesses. And then, as the world was forced to work remote, the propensity to adopt anything tech went way up. So looking back from last year to now, the world is definitely deeply impacted. It’s not, it’s not been an easy year for most companies. But some companies reaped the benefit of the pandemic, in that the tech adoption in their category resulted in offline businesses moving online at a much faster pace. So all companies that enable that shift have benefited over the last year.
You’ve closed a second seed-stage fund. Since Sequoia launched Surge and a separate seed fund in 2019, the market has attracted more players and it’s far more competitive now…
SS: We felt founders are underserved at early stages — they can do with better advice, mentorship, more help with ideas on building an enduring company. For us, capital was a small part of the equation. Surge is unique because we don’t charge a programme fee so co-investors can invest at the same terms as us.
But are valuations overheated in early stages with so much capital from the likes of Sequoia chasing pre-revenue startups?
Rajan Anandan: If you go back to 2015, there were 200-250 million internet users, monetization was virtually non-existent. Today, we have close to 600 million monthly active users, monetization is probably 10 times better than it was five years ago. In 2010, India had zero unicorns. In 2015, which was the last time everyone was saying ‘valuations are high’ and ‘there is too much capital’, there were four unicorns. At the end of 2020, we have 37 unicorns. Our view is that the seed stage is still Day One in India. In our ecosystem, there are about 3,000-4,000 startups created. At Surge, we have 15-20 companies per cohort, so as a result there is a massive whitespace here.
Ultimately, exits make a market attractive for risk investors. Is the latest boom in funding due to a lot of unicorns realistically looking to go public and what happened in the US?
SS: There are a few stages for a company to scale. A unicorn is a proxy for company scaling. Another is how many companies in the portfolio have over $100 million of revenue. As of December 2019, we had companies in the high 20s with over $100 million in revenue, which is now at 30 for this calendar year. Once companies get to scale, only then you can take them public. If you have several dozen companies that are at that scale, naturally, we will see liquidity and IPOs. We have over a dozen companies at various stages of IPO prep. The next 12-18 months will be a big moment for the whole ecosystem, because we’ll see a critical mass of IPOs. Many more are preparing more quietly; you’ll hear about them as time goes by.
So, investors will see exits from IPOs more than M&As, which has been the trajectory so far?
SS: We will see more of an IPO-centric market in India. China is exactly like that. In China, you don’t see as much M&A compared to the US; you see a lot more IPOs and it’s a function of a very rapidly scaling ecosystem.
Have Indian tech companies started focusing on unit economics, profitability and going public now more than ever before?
SS: The pandemic was truly transformational for the ecosystem because it was a moment of extreme vulnerability, where for some weeks the world was completely unclear how life would change. I think a crisis is often an enabler for companies to make dramatic shifts. And I do think that unit economics across the board improved fairly dramatically. Now, will they sustain over time? We will have to see. But at this moment, we see a much healthier profit and loss statement across the portfolio than 4-5 years ago and especially given that now they have plans to consider going public. It has dramatically improved from five years ago.
In the past year, Reliance Jio Platforms amassed billions of dollars from myriad investors like Google and Facebook. What does this mean for young startups you are investing in?
RA: Reliance Jio Platform raising $20 billion, Google’s $10 billion India digital fund, these are all positives and are massive accelerators for the Indian ecosystem. There were 100 million internet users with only 10 million on smartphones and 2 million broadband users, which is the time when I joined Google in 2011. It was impossible to build a consumer internet company, because how do you get to users? In 2020, when you have 580 million monthly active users (MAU), 400 million daily users on 4G networks, you can actually build a company like Trell ( social commerce app), which has 37 million MAUs and 7 million DAUs, a part of Surge 2 cohort.
What about the many policy and regulatory conundrums that have hit tech companies in India– be it ecommerce or what’s happening with Big Tech firms?
RA: On the policy front, the single most important policy for the Indian startup ecosystem is direct listing of Indian companies on international exchanges. The government is very supportive. We don’t think in the next five years, the big Indian startup exits will come from M&A. We think the path is to go for IPOs. Direct foreign listing enables Indian companies to go on NASDAQ and have market caps of $10- $40 billion. And therefore, they can actually go out and raise another $1-2 billion to drive global businesses.