IPO market for India tech startups still nascent: Lightspeed’s Bejul Somaia

Venture capital firm Lightspeed set up office in India in 2007. That was when most foreign VC funds were making their first bets in the country. And instinctively, they would scout for startups that were analogues of companies in the US and China. The idea was to look for bets that fit into the ‘X of Y’ mould.

Yet, Lightspeed’s executives in India were able to convince headquarters that investing in businesses that aimed to solve inherently Indian problems would be a better strategy. That’s how one of its first bets—power trading company Indian Energy Exchange—came about. It was a departure from the typical VC-backed investment of those times.

Such a bottoms-up approach worked for the fund. Bejul Somaia, a partner and de facto boss of its India operations, hogged the headlines in 2019 after a 35x exit on his $20 million-plus investment in hotel aggregator OYO. The firm still holds 2.7 percent in the IPO-bound company.

Today, Lightspeed is firmly ensconced in India with multiple exits (IEX, OYO, ItzCash, TutorVista) and more than 10 unicorns (Byju’s, Udaan, Razorpay, Sharechat) in its portfolio.

Having deployed about a billion dollars in the country, the VC firm recently closed its fourth India fund with $500 million. Somaia, who has been rewarded with a global role apart from his India responsibilities, spoke with Moneycontrol about the current funding cycle, plans for the new fund and exit opportunities. Edited excerpts:

The new fund has come when there’s talk of a recession and a drop in consumer demand. What do you make of the situation?

In the context of raising a new fund, we have a fairly sophisticated group of limited partners who have been investing in the venture asset class for a long time and understand it very well. Provided that the fund manager has done a good job, they remain committed to the manager.

The past 10 years have been very growth-oriented for the ecosystem. And when that happens, companies make trade-offs. You are not optimised towards efficiency and quality when you are tilted towards high growth. So, periods like this force a change in focus which ultimately yields stronger companies. It also means that weaker companies may not survive, but that’s part of the evolution of any start-up ecosystem.

We have seen a large correction in tech stocks in the public markets. How much of that recalibration is reflected in the private market?

A lot of late-stage companies raised capital last year. Unless they come back to the market to raise another round, there won’t be any valuation correction. If you have two-four years of cash runway, you would typically focus on execution and growing into the valuation rather than raising another round.

Of course, those companies which come back to the market for funding would see some re-adjustments. We saw that happen with Klarna. In some cases, companies might also seek convertible financing, which is a way for companies to raise capital while not necessarily having a price set in this environment.

Large venture funds like Sequoia, Andreessen Horowitz and General Catalysts tend to hold their public portfolio companies for the long term by restructuring their funds. Has Lightspeed mulled such restructuring? 

I would not comment on our internal deliberations on such things. On the specific point of holding public company stock, we have a fairly disciplined policy around distributions. Historically, our policy has been to distribute the shares in portfolio companies at the appropriate time and let them decide whether to hold onto the companies or not.

For example, when Affirm went public late last year, Lightspeed distributed a significant portion of its holdings to LPs. And it turned out to be a good thing to have done. Although we hadn’t seen the correction happen at the time, the distribution was done in accordance with our policy.
You have growth and late-stage fintech companies in your portfolio. Has there been any impact of the regulatory flux in India on your investment thesis for the sector?

Well, regulation is regulation. Companies have to adapt when there are changes. I think Uni (a portfolio company), for example, is working through an adaptation. I'm not concerned that it's an existential problem. There are ways to be compliant with regulation and build a strong business at the same time. Good teams are able to think about how they can do that while retaining their core proposition.

Are you worried about Udaan? From what we understand, their burn rate is quite high for a B2B e-commerce platform and their last two fundraises were through convertible notes.
No, we are not worried about Udaan. The company has made massive progress over the last nine months. Transaction revenue is now contribution-positive and burn has reduced by almost 70 percent. We are glad the management did this work proactively and expect to see more of this in the startup ecosystem as management teams shift focus from growth to fundamentals.

VCs have been telling e-commerce companies to join the Online Network for Digital Commerce (ONDC). What’s your take on the strategy?
It is a really interesting initiative. There are two schools of thought when we debate this internally. Of course, it is great for merchants but ultimately, it’s the buyer who would need to adopt it. In that sense, is there something that is broken on the consumer side today that ONDC can fix?

With e-commerce platforms, it is not just about the discovery of supply. There are a lot of other things like trust in the transaction, logistics and returns. I think, conceptually, it's very powerful. It is still early days and we need to see what problems it is solving on the consumer side versus the merchant side. For instance, would you say that the platforms are capturing too much value? In that case, they would be profitable, which they aren’t.

OYO, one of your larger bets in India, was slated for an initial public offering this year. We hear it might have to wait till next year. With the market choppy, what is your expectation for IPOs with regard to late-stage portfolio companies in India?

We have always thought about exits from a broader perspective. It could be through an IPO like Indian Energy Exchange, a trade sale such as ItzCash, or even via secondaries like we had for OYO. It is our job to return capital to LPs and IPOs are certainly one way of doing that. But the IPO market for tech companies in India is still nascent.

What we saw last year (tech IPOs such as Zomato, Nykaa, Paytm) was a positive development. But that market still needs to deepen. So, let's say if the IPO window is closed, that doesn't mean we're not thinking about exits through any of the other different routes.

As you deploy capital from the new $500-million fund, are there any specific areas of interest that you would like to invest in?

The broad themes remain fairly consistent across areas like SaaS, cross-border commerce, payments infrastructure. The opportunity set continues to grow. Perhaps, the India-to-global thesis is something we have been emphasising more recently. We are also getting deeper into crypto and Web 3 infrastructure, but not crypto exchanges. We still have a pretty high conviction in its importance as a technology of the future.

We are also spending a fair bit of time on new commerce models such as live-streaming. But that may end up as more of a South East Asia phenomenon than an Indian phenomenon.Many venture funds are looking at Indonesia more seriously—be it fintech or fashion. Do you also plan to focus more on the South East Asian region?

We set up our Singapore office at the beginning of 2020 and Indonesia is the big market to win if you want to build a large company in SEA. Last year, we made five investments in the region but we don’t have the target to deploy a specific amount of capital there. We are going to look for high-quality opportunities and invest when we find those.
From a digital adoption perspective, I think they are either at par or ahead of India. But, in terms of talent and founders, they might be at where India was in 2014-15. You can see the first generation of companies like Tokopedia, which have gotten to scale. Now, people are beginning to come out of those companies (and start up on their own). They don’t have institutes like the IITs or IIMs in India, which makes it hard to build an executive layer. So, you will see a lot of Indians and even Europeans there.