By Krithika Krishnamurthy
There is a softness, which means funds and companies are coming back to reality. Me-too companies with weak teams and no differentiation will not get funded. The binary situation of will-not-get-funded is coming up very fast. But there is no bubble in the seed stages. IDG Ventures India has been spot on in picking the right ecommerce companies to bet on, such as Lenskart, Myntra and Zivame. Funding for consumer-facing internet companies has slowed in recent months.
But IDG cofounders Sudhir Sethi and TC Meenakshisundaram said this represents not so much a bubble but a reality check. In an interview with ET, they also speak on top investment opportunities and the inertia of IT services companies in the startup ecosystem.
Q: What is your take on the ongoing bubble debate?
Sethi: There is a softness, which means funds and companies are coming back to reality. Me-too companies with weak teams and no differentiation will not get funded. The binary situation of will-not-get-funded is coming up very fast. But there is no bubble in the seed stages.
There is genuine intelligent capital funding the (best) of the seed companies. If you take SeriesA, it is coming back from $10 million to $3 - $5 million, and that is a very good thing.
Q: IDG has had a 100% success rate in ecommerce. What were the things that you steered clear of?
Sethi: We did not consciously go into electronic ecommerce because margins were less. We did not go into fashion-flash model, furniture and deep hyperlocal models.
Q: Why not hyperlocal?
Sethi: We were looking for this market to mature a bit. Even if today you see in hyper-local, only 1-2 companies have scaled. So we believe we are not out of the market. We are still there. We have just funded our first hyperlocal seed-stage company (undisclosed).
Q: How active are Indian IT services firms in the startup ecosystem?
Sethi: I don't think any of them understands the startup ecosystem. They may have funds, they may be funding one or two in India, but none of them has actually done anything in the past five years. To me, Indian software service firms are a nonentity in the ecosystem unless they change their mindset. So let me explain that...
Q: Go on.
Sethi: We invested in Manthan (a retail data analytics firm) and exited in 2014. IDG Ventures got a 5.3x return. (An) IT services company at one time was talking to Manthan for a relationship, and they said 'we would like to invest at 1x revenue'. This happened when international investors are willing to buy Indian companies and invest in them at 5x revenue. The mindset here is ridiculous.
Q: What are the problems in India's startup ecosystem?
TCM: One of the key challenges is getting experienced talent when (a company) scales up. But what is today perceived as a problem will get solved by itself, because there is scale. Flipkart has proved it, Myntra has proved it. They have been able to get people from other sides of the industry, from Silicon Valley. When the market opportunity is big, eventually it will get sorted out. It is a demand-supply issue.
Q: How is the industry changing?
TCM: So far, the basic rule was, if you are an investor deals will come to you. Today, investors go after companies that they believe are good, opportunities that they believe are good. That is the fundamental change happening, which is closer to how US venture capitalists operate.
Q: What is the opportunity that you have today?
TCM: We are looking at 700 new companies (to invest in) every quarter right now. Don't be surprised that it will be 1,000 a quarter. That means IDG Ventures next year is likely to look at 4,000 new companies.