From companies such as Lendingkart and PepperFry to Treebo and Saavn, Bertelsmann India Investments (BII) is making some big bets on Indian startups in areas such as fintech, ed-tech and online commerce.
However, almost all of its deals are in late stage. The company has been shy of making seed stage and Series A bets.
Pankaj Makkar, the Managing director of Bertelsmann in India explains why he is banking upon this strategy to enter at a late stage when the company has achieved a higher valuation than catch them young. He also explains how this strategy has succeeded for the VC firm.
Excerpts from an exclusive interview with Moneycontrol:
On E-commerce as a market for new investments
We have a long way to go as far as e-commerce platforms are concerned. Buying on Amazon and Flipkart are not the only ways in which you will do electronic commerce in India.
If you look at the e-commerce sector in the US, Amazon and a couple of players constitute 30 percent of the market. About 70 percent of the online sales are contributed by bloomingdale.com, macys.com, and rest of the other brands.
That entire segment is not even ‘live’ in India. A lot of interesting companies will get made on that segment. So we will continue to be bullish on online commerce and we as Bertelsmann India are trying to catch the next wave in the sector.
On many players shutting down in e-tailing segment
For every sector, if it’s a category where the winner takes most, and 10 players start-up, everybody knows that the end of the day, only one or two will win, about seven will die.
Everybody knew that at the starting point. Why are we getting afraid that several companies in online retail are not performing well, the category is like such. But for the two players that will win the race – it will build a very large business for them.
After that, there may be a lot of other players who will fill up the balance e-commerce category. They may not be as large as Flipkart or an Amazon.
They maybe probably half of their size but that is also a big outcome. We are planning to tap the next wave of e-commerce.
On Bertelsmann’s focus on only Series B C deals:
We came into India in 2013 and started investing in startups.
Even at that time a lot of people advised us to go and start doing seed stage investments, go and invest in 50 odd companies and we said no, we don’t want to do that.
The idea is to find real gems and continue to back them so that they become big. First of all we not diversify, we will make consolidated bets.
We don’t want to play seed and Series A because a lot of players are already doing that. What we realized was that there was not even one single investor who was doing Series B only.
There was a big gap in the market for Series B, C and D investments space.
On most investors shying away from Series B and later stage segment:
They just feel that if you have to take a venture, take it early at a cheaper price. They think that cheaper is better. But cheaper also means riskier.
So we thought that let us take less risk but we will pay a higher valuation price tag. Also at Bertelsmann, we are very strong in building businesses.
Series A and seed companies are all about building technology and product.
We are only a Series B and C investor. We need the company to be mature, it has to have revenue, it needs to have a product which is doing extremely well in the market.
On the kind of companies Bertelsmann is looking to invest:
We are looking for companies which already have the product and a great team and wants to make it a big business.
That was our valuation proposition and the good thing was there was no one in the market doing it. A lot of VC entrepreneurs that are series A funds love those things about us.
You are coming to us with a very different proposition and you are telling us what we want to hear. Then we will partner with you.
So we got lucky and got many good companies in our portfolios and we are helping them to make it big.
A portfolio of VC should have 70 percent of companies that should die. Only 30 percent startups make you money.
For us it is the other way around, 70-80 percent of our companies make money.
We now see more people coming into Series B and series C funds. In last 12 months, we have heard about people who wanted to do what we started doing much earlier. I feel humbled.
On investing in fintech companies and future of the sector:
We feel that fundamentally in India financial services is definitely under-penetrated. Brick and mortar model of building financial services doesn’t work properly, especially in the remotest part of the country.
The only way to serve that market is through online and therefore a lot more online companies will get formed in that category.
But we think that fintech will be a very great play. We have invested last year in a company called LendingKart. An investor in that company has grown 3x, managing, good default levels. The innovation that they are doing around data science is amazing.
I think that’s pretty amazing space (lending) for us as well in fintech.
On why Bertelsmann is banking on education-tech startups:
Education for us is very strong. We see a lot of VCs have not had tremendous success in education but it is a very large sector and it should have innovation.
We invested in three companies by now and the last one was Eruditus which is a phenomenal company.
I feel that the next company which will build a large number of business, even becoming a unicorn at some point is Eruditus.
We feel that there are very interesting gems in India.
As Bertelsmann, we have very strong insights in the educational sector.
Globally we have invested in companies like Udacity, and others.
We feel that what happened with media and online commerce in the 1990s where companies like Amazon and Google etc were formed, that disruption is happening in education now.
Higher education globally is a 2.2 trillion dollar market, second largest after health care. And that is going for disruption
It gives us chill because a sector like education which had a ‘pathshala’ concept 200 years ago, still has a classroom concept today. Zero disruption, zero innovation finally is getting disrupted by online technologies.
Maybe other VCs don’t have detailed insights about the sector as we do.
On problems in the education-tech sector in India:
I think in India the challenge in some of the areas in education is that regulations are very tight and it doesn’t allow people to build strong companies.
Probably that is the reason why a lot of VCs are nervous about education – its regulatory challenges.
However if the full sector is 100, there is a 20 to 30 percent area which is non-regulated.
In that area, building companies in India is not an issue. We see a lot action in the non-regulated area.
Unlike digital sector, e-commerce sector where a number of entrepreneurs are trying to innovate too much.
In education, you don’t have as many deals in India.
So, therefore, there is an issue of supply where there aren’t too many good entrepreneurs building great companies.
However, if there are certain entrepreneurs who end up being good entrepreneurs and they are building up companies. They will end up conquering that entire market.
So you could take that as a negative view or a positive view. We take that as a positive view.
We feel that in Education, we are sitting and building the beginning of the first wave where Udacity builds one product, Canvas builds one product, everybody builds the one-one product.
Let that happen for 5-7 years then let them start connecting the dots. That’s where the real revolution in education will begin.
You need patience for innovation. As Bertelsmann, we want to build businesses with a very long term view.
Yes, we are investors, we are a fund, we will exit in 5-7 years but the business will continue. We as an investor want to make sure that the company survives 20-40 years at least.