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Welcome to another edition of BCL Interviews. Joining us today is Mr Nandan Venkatachalam who is currently a principal at Axilor Ventures. He Leads the B2B tech investments across sectors like SaaS, Supply Chain & Logistics. Prior to this, he was with the investment banking team at Mosaic Capital, an Indian & Europe focused investment banking firm, where he worked on mid-market mergers and acquisitions. Prior to that, he was with JP Morgan. Thank you Nandan, for taking the time out of your day to speak with us, we really do appreciate it.

What are the trends in the startup world and which sector is gaining attention?

Sure Sandeep, so in a phase where I think it’s probably the best time to be an entrepreneur or a startup so to speak, there’s also the market being flush with liquidity, thanks to some of the late-stage rounds happening. So I think it’s probably the best time to be an entrepreneur, I think that’s the way I would put it or start this conversation, that it’s the best time to be an entrepreneur, best time to think about the startups that you’ve always been thinking about. You know, a lot of different ideas are coming in, but more importantly, there’s a lot of tailwind coming in from both the funding side and customers starting to adopt more kinds of startup companies etc. 

So having said that, you know, the market is obviously flush with liquidity, you have all these unicorns being announced pretty much on a weekly basis. Now, you have companies going public, all that leads to several millionaires being created. And millennials, obviously, with their money, would want to invest and give it back to the ecosystem in some way or the other. So that’s where all the angel funding capacity comes in from. Growth stage rounds are happening as well and you know, all that is leading to a frenzy on the early stage. And we’ve seen it with a lot as well, they are having to look at multiple deals at the same time. But the pace of the deals has increased, having to take decisions in a much faster manner. 

And also in a manner with sometimes limited information, right. So we’re seeing that kind of velocity increasing from time to time. And largely that’s where I want to enter this entire conversation with that, there’s a lot of funding out there in the ecosystem, it’s a good time to be building something, there’s a lot of talent available out there in the market. And at the same time, you have newer ideas coming in, from entrepreneurs, people being second-time founders having built up large categories, etc. In the past, in terms of teams, specifically, I would say that probably there are two kinds of teams, one is building for India, and one is building from India, for the global market. I would put it across in a very short way outside of the second category first, obviously building out of India for global markets, which is effectively taking advantage of the cost arbitrage. Trying to find local talent in India, but building a product at a global scale, and you’re able to sell it in urban markets as a result of that. So some sectors such as enterprise, tech, SaaS, deep tech, all of these will come under this category. These have largely been evergreen sectors, at least for the last three to four years, we’ve not seen too much of a lull in funding. 

But you know, if anything, the funding has continued to go up. And even the number of companies being funded in these segments continues to grow. The second opportunity is obviously India based and India focused. The overlying theme of over here is the entire Reliance Jio wave which has given birth to a new set of several hundreds of millions of internet users. A new audience in terms of tier two, three, you know, obviously, when you have a number of internet users, their aspirations also continue to rise, their purchasing power continues to rise. And hence, there’s a lot of consumer demand from people in tier two, three cities as well. So that’s largely been the focus area for you know, India focused companies or startups building for the India market though this doesn’t necessarily have to be just on the consumer side. There’s also the b2b angle to it, where you have SMEs adopting digitization tools, tech tools, you know, as a result of the entire wave of internet digitization, etc.

So, within this, we look at two, three subcategories, obviously that of content companies, you know, a lot of them like share, chat, etc, obviously, which have gone on to this larger, but you’re seeing newer and newer companies coming in within these niches itself. For example, within Axilor we’ve taken, I think, three bets over the last 12 months or so, trying to ride on a new wave of consumer content companies, obviously we’ve done companies like Headphone on the audio side, we recently did an investment called Loco which is you know, eSports and streaming side of things, so we’re seeing a new batch of content companies being created. As a result, you know,  content consumption is on the rise, people are watching more and more content, consuming face content, by the phone, etc. On the other side, you have sectors like EdTech, which are obviously, you know, hot right now, but they also picked up steam over the last 12 months or so, thanks to the entire lockdown, students being at home, wanting to learn, you know, via their phones, tablets, computers, etc, switching the entire EdTech wave, not just heading to one market, but also tier two and three markets. 

Right. So that’s lastly on the content side of things. But there are also sectors like e-commerce, b2c, etc, which have taken, you know, a new wave altogether. Over the last 15-20 months or so, especially on the b2c side, where we’ve seen the emergence of new challenger brands coming in, looking to disrupt the traditional FMCG segments across different categories. And a lot of products have not been seen out there in the market before. So, over time the entire logistics and fulfilment functions are having to scale up as well, to cater to all kinds of demand in the ecosystem. Traditionally, e-commerce continues to thrive. Because obviously, people have been at home supporting e-commerce orders as a result of that right from your hyperlocal grocery delivery to your regular purchases that you make on a monthly basis. You rarely see people going to the supermarkets etc. These things are the third wave, which I would say is a combination of these two, I would call this the hybrid wave, which is a combination of companies building out for Indian markets as well as companies building on from global markets, right. So these would be areas such as supply chain digitization, it’s, you know, a core theme that we at Axilor had a call after the last 18 months or so, we’ll get large verticals, which have largely been undigitized for the last several hundreds of years, right. 

You have some pen and paper digitization advice, people have moved to WhatsApp, but there’s no formal mechanism for digitization. And so seeing a new wave of supply chain companies bidding for these markets, effectively looking to digitize the supply chain and bringing in a layer of b2b commerce to this entire peace, right. So that can obviously be India focused, but it can also be globally focused, where you start exporting goods and products and things like that. So you have this hybrid, obviously the b2b, and then you have the b2c side, there are certain COVID-induced themes. You know, for example, in sectors like health care, certain aspects of healthcare have taken a hit because of COVID, where, you know, hospitals have been occupied with, you know, COVID patients, etc. So there’s been no room to do much else there. But there are sectors that will bounce back as a result. And there are also sectors within healthcare, which are private as a result of COVID. 

You know, we see people being locked out at home, the entire mental health space came into focus very sharply, so that we have had a lot of startups going after areas such as that which are very important problems to solve, if you look at it from a larger picture. So some of these, I believe, are COVID-induced themes, but largely evergreen themes are still present in the market

What are investors looking for in companies today? Is profitability gaining prominence? Are breakeven points becoming shorter? And how does one pitch to investors in 2021?

Right, so there are two parts to your question. So, how does one pitch to an investor 2021? I’ll start off with that, I’ll come back to the profitability question a bit later. So effectively, I think we’re seeing a new wave of entrepreneurs coming in, largely driven by some of the large unicorns, category leaders in spaces, etc. So you’re either seeing serial entrepreneurs who are coming out of their previous startups and starting to do something else, or you’re seeing large category heads, CXOs, that larger organizations coming up and looking to startup. So as a result of all of that the quality has gone up significantly. Obviously, right now it is a founders market where, you know, market slashes, funds and founders are able to determine which VC they want to go after or which VC they want to pick. 

So let’s dive in the market or logic thing, but you know, eventually we believe that quality continues to get funded. Right. So we don’t have or at least we have not seen too many startups which are lacking severely on the team side. That is something that’s continuing to get sorted for, but as a result of that, the benchmark will continue to rise, right? So if you’re a startup, pitching to the investor in 2021, and I think there are three or four things that you need to keep in mind. While you’re talking about seed stage companies, obviously these things differ from stage to stage as the company moved from seed to A or seed to B, it will be a very different set of metrics that an investor will look at. Lastly, we look at three things. We look at the quality of the team, right so they don’t necessarily need to be serial entrepreneurs. But you know, having a large domain helps significantly because you can really see the quality of the conversations, you know where the vision of the business is heading, and as a result, the desire that the founder has, right? 

So the quality of the team is really going to matter, like well rounded teams, obviously teams who have strong domain expertise, teams who have networks where they can tap into and bring in the first few 100 customers, teams that are able to hire very effectively, right? And more importantly, teams are able to build up narratives, right? Because everything about a VC fundraising is about whether you have a pen and paper plan, if you’re able to explain as to why you are expecting a trend in the market and why you’re solving a problem. That’s an inherently difficult problem to solve. I think you know that it takes a different skill altogether to communicate that to investors. So having a vision in mind, ability to speak numbers, because sometimes we do see founders getting a little stuck up even when it comes to numbers, for example, what’s your market size, who’s the target audience that you’re looking at? What are the budgets that they’re looking at? What’s your spending going to look like? These are not necessarily projected numbers. And these are a broad range of numbers in which they operate from a market perspective. 

So it’s important that you have all of that put into the picture over there. What comes after the team is the opportunity size that they’re going after, the reason I say it goes up to the team is because you can never recreate a quality, right. Whereas if it’s a quality team working in a small market opportunity, there’s always an opportunity for them to pivot and do something else after that. So opportunity size comes next. So we obviously like to go after large opportunities, which have been largely undigitized. There is an opportunity to look at new sub verticals within the opportunity itself. So market size is one thing, but you know, also is that whether it’s an expanding market, is that a contracting market? Is it something that will continue to remain static for a very long time? What are the drivers within this market’s purchasing power, you know, applied to both b2b and b2c. So inherently the magic formula for certain early stages is a strong founding team going after a large market opportunity. So there’s a third layer below that, but we largely believe that those things are coachable. You can, you know, have the best pitch deck out there, you have a different way of pitching to an investor. You know, those are things that can be developed over time.

So that will come as a third layer to know how to effectively be able to crack the market, how effectively you are able to go after customers or customers speaking, you know, good things about you as a funding team. And you know, those kinds of secondary earlier metrics, but the primary two things that a seed stage obviously are, what kind of team are you and what kind of opportunity after these things vary at a later stage. So as you as the company goes, series, A, B, C, you’ll have a different set of metrics coming in, we start looking at things like customer cohorts, unit economics, those kinds of things will start coming in. Obviously, growth is probably the number one catalyst for any kind of fundraise that needs to take place, right? There’s no business growth. And typically, there’s no conversation whatsoever. So these kinds of metrics come in at a later stage. But what we do effectively as a seed fund is take in all the series B inputs or series A funding portfolio metrics that they look at, and effectively start measuring those for our company from day one, right. 

So all of this effectively flows back into the system. So you have a scenario where some of the series A funds take feedback from the late stage funds and feed it back into their portfolio companies. And that’s exactly what we do at a seed stage. So coming to a second point on whether profitability is gaining prominence, I think we’ve seen two or three waves of the entire startup lifecycle, right, so you had the entire 2013 to 2015 wave, there’s a lot of capital flush in the ecosystem, but into high-burn models where there was no focus at all on unit economics, it was just about burning as much capital possible to go and get every possible customer out there, whether the customer would be an active customer on the platform or a dormant customer, it didn’t really matter. But this wave seems to be very different. You know, obviously, there’s a lot of funding happening out there in the market. But there’s also a lot of diligence being done in terms of unit economics, you know, contribution margin, those are things that you know, were not too much of a talking point in the first wave that we effectively saw, right, so it’s been a combination of feedback coming from the stage funds, but also you had this entire, you know, COVID-induced cash burn cut back that that happened over the last year, 12-15 months or so. 

So, as we get to April 2020, March 2020, as we went into lockdown, the first thing that founders had to do was to find a way to cut costs. You know, obviously, a lot of layoffs etc. But there was a sharp focus coming in on unit economics profitability, or at least breaking even. Right. So that’s a DNA that’s kind of been built into founders, sectors that, you know, didn’t see too much of that ended up suffering and having a lot of mortality from a startup perspective. But you know, there are founders who’ve done remarkably, very well, you know, from that perspective, to look at how they can save on costs, cut down on burn, etc. So, remarkable comeback from founders, at least from a resilience perspective. But that effectively meant that you’ve had a new set of metrics that are being brought back into the picture. So there is a sharp focus on unit economics, I think profitability will come, your new age of internet companies will continue to burn some capital. 

And I think the public markets are also starting to embrace that, you’ve seen in Zomato, etc. that, you know, there was a stark reaction from a loss making perspective. But we also saw that, you know, this is how new age companies will continue to grow for a while. So, we’re not completely focused on profitability, but the same unit economics definitely comes into the picture. But are you able to make enough money on a per unit basis, per order basis, what your contribution margins look like LTV to CAC, you know, some of these metrics that were typically not measured in the first wave.

What can stakeholders in the ecosystem do better to help startups? E.g. What is the expectation founders have from investors, banks, subject experts and government?

You know, I think the startup and the founders are the focal point of all of this, there’s a typical saying in English, it takes an entire village to raise a child. So I think that’s pretty much how it is, everyone plays a role, some more important than the other, but obviously, the founders and the startup remain at the fulcrum of all of this, right. So as investors, obviously, our primary bread and butter is to provide capital to the company and help them up to the next stage of growth, etc. But you know, they could figure out the growth better without us, that is 100% true, and as possible as well, that they will definitely figure out growth hacks without the investor. So I would like to understand or like to think that the investors main role is to bring in the capital, both for the current round and effectively facilitate for capital for the next time, etc. And that can continuously remain the main focus of our practice. 

Obviously, there are significant value additions that we have for portfolio companies, and you know, we’d really like to think that we are adding value by contributing to their success, but we do it in the best way possible. In terms of having found the rapid growth, helping the founders out in terms of, you know, figuring out the narratives, customer introductions, it could be on the hiring side, all those kinds of help that the investor typically tends to bring in. But, you know, having said all of that, the business value continues to remain capitalistic. There are the ecosystem players, obviously, regulatory and government plays a very key role in all of this. They set the regulation, the boundaries on which the startups need to operate their needs, or continues to be more focused on, you know, how to make life easier for startups, from from a capital raising perspective, from an FDI perspective, from a growth perspective, like keeping all that in mind, making business easier continues to remain a core area of focus for the regulators, but these things take time, right? 

So it’s not like you can immediately have regulatory changes that will help the startup overnight, sometimes these things do tend to get exploited as well. So there’s a bit of caution that’s always exercised with regard to all of that.

But regulators play a very critical role in helping startups with ease of business, both from a cross border and domestic perspective, so that applies to all aspects, for example, something as tiny as ease of taxation, Indian taxation, you could have stuff on their FDI capital inflows. How do you make it simpler for a company to wind down your money, you know, that they shut down from a business perspective? How do you make it easier for them to find out, because sometimes founders run from pillar to post just to complete compliance. So there are areas of improvement but you know, regulators do play a critical role in helping these businesses. And then there are other stakeholders, right, you know, for example, you have recruiters who help with hiring, which is the single biggest pain point of a startup. 

You have folks like BCL, etc, who make the lives of startups easier. Thanks to, you know, all the frameworks that are being brought in, making it easy for the founders. So just focus on the business aspect, while outsourcing most of the other companies for the business like finance, tax, etc, right? Then you have banks and customers. I’ll put both of them under the same bucket clearly from the optics perspective that, you know, typically, a startup selling to a bank or a customer, an enterprise customer is a very difficult proposition, or it was a very difficult proposition historically, right? Because how do you trust the young startup? You know, past API’s? It could be customer data, could you trust them, and so forth. But over time, that has changed, I think, I would like to think that over the last 15 months, there have been more digital transformation programs, helping enterprises and banks adopt a lot of startup technology. 

So that divide is also, you know, reducing day by day. So we’re seeing a more coherent behavior when it comes to enterprise customers adopting startup related products. So all of them have an important role to play, I think, you know, there’s no single point of contact, which has a higher role to play than the other. But having said all of that, you know, the startup and the founders continue to remain at the center performance business.

In the next 3-4 years, what areas do you see gaining traction? For example, blockchain, crypto, urban / rural needs etc.

That’s an interesting question. I think I’ll come back to the first question or the answer to the first question, obviously, like I said, we’re entering with a new wave of funding activities, a lot of liquidity and talent in the market. So we are going to see some emerging themes coming in. But having said that, some of the problems or opportunities that the founders can go after in India will continue to remain very India-centric and specific, right? And for example, its supply chain digitization themes that I mentioned, we are starting at at a really low point from a digitization perspective, that it’s going to take a few years to build up any kind of digital layer, before which we can see the kind of activity that we’ve seen in other economies, you will have crypto, blockchain, etc, you know, subject to certain regulatory standpoints, there will be slow adoption of all of these, but they will be mainstream adoption happening in a few years time once crypto becomes mainstream, in countries like India and some of the emerging markets. 

So we’ll have some of those coming in. But going back to my initial three themes, those will continue to be the crux of the startup ecosystem in India, you’ll have different verticals to go in within those different problems, you will continue to have founders solving for global market problems building out of India, you will continue to have the rising internet population, you will have, you know, desperation and tier two, three, going up continuously. So, you know, India is such a diverse country. So the problem sets that you have founders going after are also equally diverse. So, you know, whether tier two or three, you’re not going to cover all geographies. On day one, you’re going to have geography specific companies coming up, you know, companies, especially within the north, south. You have areas like agri-tech, which is again the core area of focus for us, but they continue to largely be India specific problems that are found.

So that and you know, we’ll have a hybrid where you have supply chain solutions happening both in India as well as for the import and export markets. And around all of these will have enablers such as logistics, you know, export-import companies, FinTech companies, etc, to build around all of these categories. And as I spoke about, we’ll continue to watch out for some of these themes. But we’ll also have new age stuff picking up in India, for example, game streaming is a new area that we’ve been looking at, gaming as a segment is relatively new, I think you’ve had some breakout companies coming in over the last three to four years, but it continues to remain nascent or new for India. 

So we are bullish on certain developers or companies in the gaming sector, so that’s a new area of opportunity, and tech will continue to thrive. And obviously healthcare, you know, the infrastructure as the second wave of COVID showed that, you know, we’re fairly underdeveloped in terms of we’ll have to continue to build the healthcare systems in India. So all of these in mind, you know, bullish, completely bullish on India as a startup market, at least for the next 15 years. And so, I’d like to believe that we are where Silicon Valley was probably in the early 90s, mid-90s. So still a long way to go, but completely excited about both existing opportunities and emerging opportunities that are expected to come out.

Write to Nandan at nandan@axilor.com

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