If a founder is reading this, you should know that A91 Partners will not send you an investment offer (term sheet) in one day, or after one meeting, and rush to close a deal over a weekend, as is the trend these days . The practice of spending serious time with entrepreneurs before and after an investment, can be seen as a commitment to active ownership-not being mere money bags- or seen as a relic of an older time, when unicorns were less common than cows in India.
But if anything, A91- an investor in growth stage startups, prides itself on spending this time. This is why they struck out on their own, in fact. The joke goes that in a resume, the only brand stronger than Sequoia Capital is ex-Sequoia Capital. VT Bharadwaj, Gautam Mago and Abhay Pandey, who left Sequoia India as partners in 2017 and 2018, would know. Between the three of them, their Sequoia portfolio included hotel chain Oyo, paint maker Indigo Paints, beer-maker Bira91, Fogg deodorant parent Vini Cosmetics. A91 raised a $350 million first fund in 2019, betting on companies such as Digit Insurance, news aggregator InShorts and lender Aye Finance.
Its investment in Digit has already grown four times, others are on track for more. A91’s portfolio makes for interesting reading- firms like SUGAR Cosmetics, InShorts and Paper Boat attract most investors. But their lesser known bets, on spices-maker Pushp, dry-fruits firm Happilo and software firm Exotel round out a strategy hardly any other fund in India is pursuing, but many want to pursue- somewhere between venture capital and private equity.
Now, armed with a second fund of $550 million, Bharadwaj and Pandey joined Zoom from A91’s plush office in Worli, while Mago joined later on from Trident Hotel, BKC. In their first interview since leaving Sequoia, they spoke about having strong beliefs when the venture industry is sitting on record but uncertain returns, tackling governance issues, the promise and perils of the Thrasio model and reflected on life after Sequoia. The interview was edited for clarity and context.
It is a very interesting time to raise a fund. A91 has not always gone after the hot deals but hot deals or not, what is your reading on the market?
Abhay: It is (an interesting time), but it’s not like we timed the fund to raise it now. We have an investment cycle of 2-3 years. Therefore, irrespective of where the fund market was/is, our fund would have been raised about now. You’re right, we are at a time when capital flows into India are at an all time high. That makes our life as a fund manager more difficult. We are aware of that, and have to navigate that as we go along.
We cannot ignore it. Neither can we get carried away by it or get paralysed by it, saying, “what do we do now?'' We have a mandate from our LPs and we have to stick to that.
Sure. What was the rationale to raise a larger fund? Traditionally, it has been very hard to return large funds in India, and I thought $350 million in 2019 was your ideal fund size.
Abhay: It is very hard to predict 3 years out what the ideal fund size should be. We would have thought 350, plus or minus 20% would be the size, due to the nature of the market. But, the last three years have been dramatically different. Everyone’s belief in the India opportunity is significantly higher, led largely by much better quality people turning entrepreneurs and capital willing to be more supportive. The belief that outcomes can be much larger is playing on everyone’s mind. None of us would have imagined Zomato to be a Rs 1 lakh crore + company today. We’ve been surprised with the upside.
So what could have been a $15-$20 million Series B can now be a $20-$25 million Series B (sidenote: at a time when Series A rounds are even going into three figures). Our first fund had 13 companies. This fund will have 15-19. Put these together, the size inflation and number of deals takes us to a larger fund size. We could not have seen this earlier. But we learn and react to the market.
VT: From an absolute amount of capital per company point of view, in the first fund we had said $20-$25 million. And, as we look at practical experience, the truth is that it has been closer to 25. So eventually, including follow ons we will have $25-30 million per company. We’re trying to make prudent choices and I hope we are proven right. It looks like the first fund’s size was right.
Do you have a deal pipeline?
Abhay: Oh there is a big pipeline out there. We will try to get into the best companies at what we think are appropriate valuations. The founders may decide otherwise (laughs) but I should admit we are looking at high quality companies that surprise us all the time. But we have to ensure our returns are not compromised- you can stretch the valuation, given the quality of companies, but you can stretch only to a certain level. Therefore, it is possible- and it has happened a few times in the last six months that we put our best foot forward but that’s not been good enough.
Thirdly, availability of capital also makes it harder to understand who are the founders who have a persistence to build a business that’s enduring over a long period of time, where there will be ups and downs.
But we think of ourselves as hey, we are around. We’re here (seemingly) forever. And this is private capital that will be available to our founders to build over many years. So, we have to tell our founders that we have patience, we have experience and have seen this type of movie play out before. So hopefully you will have the advantage of having someone like us, if you choose us.
What stands out about A91 is that you have strong beliefs. About genuinely wanting to be more than capital, about being partners, not just taking bets. But the current market is rewarding completely different things- short term growth, immediate valuations. If you want to back a great founder, and the founder’s beliefs diverge from yours, how do you deal with that?
Abhay: It is not that we know everything, Sriram. We also learn. What we put out there is beliefs based on what we have seen over years of investing together. If we see things that are very different from our beliefs but are working, would we be open to changing our beliefs? Absolutely. It is foolish to say we know everything, that’s not true. We will have to change our beliefs if there is strong evidence of things working the other way.
Some of the fundamentals of business, all else equal, don’t change. But say we believe that a good way of building a business is by raising no more than $100 million. But today suddenly if the size of the market opportunity can be expanded, and the entrepreneur wants to raise $200 million, we have to change, because the size of outcomes is changing. If you can show a larger market it is okay to go after that.
But building a team around you, not being a solo person, that should not change.
Your portfolio looks largely stable, a bit closer to private equity than VC. The downside though is that you don’t have a company that will become a unicorn and decacorn in months. Will you have to take more risk from Fund 2?
VT: First of all, if you think we are stable I’m glad to hear it! Because over our years of investing we have seen enough surprises. See, we are looking to build enduring businesses. It has to be enduring. Now, do we want them to be hugely successful in a short period of time? Of course! It would be crazy if we didn’t. We would be thrilled to have an investment that gets very big very fast. But the principle is still for a business to endure. As a team we have to convince ourselves that this company will be up and running, maybe not today, but in the next 3,5,7 years and more.
When you look at Fund 1 and see your plans for Fund 2, what would you say you did right, and what could you have done better?
Abhay: We think about it all the time. What we did right was we constructed a portfolio sticking to our thesis and what we had told our LPs- getting into high quality companies with a chance of making returns of over 5x. We’re seeing some investments look better than that already.
What we debate though, is our misses, and what we could have done better. There were companies we saw and passed, either because we did not believe the trajectory they were projecting or the market opportunity they were chasing- or in some cases the valuation they were asking. In retrospect, there are 3-4 companies that, in spite of their trajectory or valuation, have played out much better than we thought. We blame ourselves for missing those.
We should do a better job of looking into the future or spending time to understand them and their aspirations better. We had some biases of our past, having seen similar businesses which didn’t grow in the past, and that may have affected our thinking. Which is where we open up and say, okay, this is possible. We are coming from a time when (revenues of) 0 to 100 crore used to take 5 years. Now, it can take 18 months or less. So we can’t get stuck to a philosophy
VT: One thing we have done well, we promised our founders and investors a focused portfolio. We will give undivided attention to every company we invest in. And that’s a promise we will continue to make. We are here for your journey, and what matters to you matters to us. Because it is a concentrated, focused portfolio, relative to everything else.
How do you stay relevant in the market? What if the founder says, I don’t need your time, I need your capital, and let me work with that?
Abhay: Anybody who doesn’t ask this question, about staying relevant is making a mistake. There are examples in every business, of people thinking they are well set, doing well, and they disappear. They don’t matter. What we ask is, 10 years later if A91 failed, what would the reasons for that be? That’s a very important pre-post-mortem, if you will. And, therefore while we want to add value to every portfolio company, the company may not want that and we have to be flexible.
With the speed of deals, high valuations for unproven companies, lots of money around, do you worry about governance issues at companies?
Abhay: In general, we are less concerned about governance than ten years ago. Today, we are generally backing first generation entrepreneurs with backgrounds similar to ours. Having said that, there are enough instances of people like us getting carried away by the environment of surpluses. You have to be careful about it but it is not something we spent sleepless nights on.
VT: Human beings are human beings, so in times of greed and excesses you are bound to see challenging practices. You have to be watchful. We have always had the chance to do diligence, even with founders we have known for many years. From an ecosystem standpoint, governance is an even more important metric than valuations.
Abhay: But we have a role to play and that should not be undermined. Governance lapses that happen today are not about people taking money from the company. It is about creating structures where ownership may be disproportionate or there may be misaligned interests. For example, starting a subsidiary and having a stake in that outside of the main company.
At a time when everything is getting marked up and investments are looking good, investors usually turn the other way, saying hey it’s all good, I’m nicely in the money. So if the founder is doing something inappropriate they say it’s okay. You have to say, it is not okay.
Is it harder to ask the founder tough questions- not just governance but even disagreements in general, when the founder is making your investment worth a lot more?
Gautam: It is harder, but you also put yourself in the shoes of the founder. The founder is reacting to what is happening in the market. Company X and Y are competing, and Y is spending more than X. X may be more efficient, but it is hard to be dramatically more efficient. It is about competitive dynamics as well.
Fundamentally, founders run companies and investors are there to be a sounding board and sanity check. It is always yin and yang. If someone is running a business and sees an opportunity you have to trust them. But the human mind is a mysterious thing, which can see opportunities where there are none. And none when there are some. It is more difficult because the level of competition in the market is making it more difficult.
VT and Abhay, both of you have invested in many consumer brands over the years, even before D2C (Direct to consumer) became a buzzword. What do you make of this D2C revolution? And is the online retail market big enough for so many players?
VT: The word D2C is used in so many different contexts, it is difficult to pin down what it means. We define it a bit more broadly that it is a consumer brand which began its journey digital first, serving customers either through their own channels or marketplaces (Flipkart, Amazon etc) and use that as an opportunity to build a broad-based consumer brand.
While people may start saying I will only sell online or on my channel, the smarter founders are saying, look I will build a consumer brand. So I will use my customer insights and ability to develop products to build a large business. But eventually it will not matter to me how many of my customers reach out and buy online or offline. And it may start online, where I’m using my own marketing, use Facebook or Google etc, but many of these brands are now advertising on Hotstar, TV and IPL right?
So, I think consumer entrepreneurs have done exactly that. They have used digital to build an early understanding of the category, brand, product and relationship with customers, but build across all channels and mediums, because eventually you don’t know how many customers will access your product via which medium. I don’t think anyone smart is being dogmatic saying I will sell only online because then your success is a function of how big online retail is. The digital consumer founder is saying I will sell whichever channel- general or modern trade- can take my product. And finding that out is key.
What are the risks for these brands?
VT: The risks to scale are product relevance and price points. Also to not get caught up about channels. To see it as broad-based and see, am I present in every way in which I can reach the customer- whether it is Amazon, Swiggy Instamart or my kirana store. And how my economics and math will work across all channels. So pick your spot. If you say I’ll sell only here, that has implications on your relevance.
Second is competition. Competitive intensity is highest if you are only digital or only own channel. That is inevitable. But if you’re starting there, see how you can quickly expand and navigate the market you’re serving and become a large business. These are the only two questions you have to answer.
What is your advice to portfolio founders today?
Abhay: One certainly is, if you have a capital raise plan in the next 6-12 months, raise it now. Do not get carried away with spending the capital. Because customer acquisition costs are getting high and will remain high because of the amount of capital every company has. Look for smarter ways to acquire customers, leverage existing platforms rather than doing it from your own channel. And hold on to your best people. Because talent is the area which is getting more and more affected today, people are being poached away with ESOPs and high compensations. Speak and be in touch with your best performing talent, make sure they have ESOPs, understand their role and relevance in the organisation, and can see their future in the organisation.
Where do you sit on the Thrasio model, one of the hottest consumer spaces today?
Abhay: We are intrigued. We haven’t invested but that doesn’t mean we are not looking at a couple of them. It is a combination of being a very good investor or M&A person; and to be able to add value and take it to the next level. We are applying a strong lens on, can you pick well-- because there is a lot out there, doesn’t mean you can buy anything.
It is fine to buy revenue and raise money (based) on that but you have to ensure companies are buying good quality, or even reasonable quality assets, because good assets are very hard to buy. And then what multiples can you get, because you are betting on the value you can add. That’s a question we are taking seriously. If we haven’t invested it, it is to pause and see some proof of concept. Both these skills (investor and operator/adding value) are not that straightforward
VT: One implication of the activity in that space has been that small companies are reaching out to our portfolio companies. They have offers from Thrasio-type companies and they are considering whether they should sell to someone bigger than them who is building something similar, or become part of another operating company- and which of them knows how to work with founders? That is what has traditionally been missing in India- founders don’t want to sell to a traditional company, but are quite happy to work with a new-age modern company. So, we also have to evaluate whether it makes sense for our portfolio companies.
How is life different for you now, compared to Sequoia?
Silence for about 10 seconds. VT laughs saying, it’s been so long since we have been asked this. Silence for 10 seconds again
VT: We are founders, trying to build an enduring business ourselves. And that is the lens with which every decision gets taken. We are in this long journey of building a special institution from India. It is challenging, it is very hard and there are lots of questions we have to ask ourselves, but it is a different experience.
Abhay: We are certainly thinking more long term now, than while you’re at a platform- where, as an investor you still think long term, but it is still a ‘job’ if you will. If Sequoia made a mistake, there would be an impact on individuals, but the franchise was not affected. There were professionals, and then there was Sequoia, the franchise.
There isn’t much of a difference between A91 and us. You are more responsible for your actions and therefore have to be more thoughtful about anything you do over the longer term. There is greater responsibility. You also feel more excited about successes because there is greater ownership.
But in a large franchise, the extent of support and the ecosystem around you is much larger. You have wider access to people and service providers. The brand is more powerful, because it has been built over 50 years. We have to make sure that whatever personal brand and credibility we have gets into A91 and builds from hereon. We were drawing from Sequoia. We are giving to A91. You call someone and say I’m from A91, they say, who A91? That would never happen with Sequoia. That’s something you miss in your early days.
Gautam: We are trying to be an Indian venture capital firm and there aren’t too many templates for that. You have to forge your own path more.
At Sequoia there were much larger factors at play, more capital if needed, internal pressures, and a larger team. Did it take you time to find the right investing pace with A91?
Abhay: When we started we put together how many deals me, VT and Gautam had done, how often we were meeting entrepreneurs, liking them, and investing. And we decided the fund size based on that. So whatever we did at Sequoia over 10 years, we chose some average of that. Our current pace is not super different from what we were doing at Sequoia.
What is your biggest challenge today?
Abhay: When you have a good start, things are going well, the market is super buoyant, there is a risk of getting carried away, saying we got it, we know this. And that’s a very very dangerous place to be.
Secondly, times are changing and the world is changing around us. To not be cognisant of that, be super stuck around your beliefs saying these are my learnings and I will keep getting stuck to these learnings- if you get stuck to logos, saying here’s a good deal from 2015, or 2017 can be dangerous. We have to learn and evolve as the market evolves.
VT: There is India opportunity and there is India reality. How do you make sure you are constantly processing both to make the right decisions? I think about that a lot. And second is what Abhay said, and it is worth repeating, about constantly learning. Investing is a brutal business. Forget what went right- what went wrong and what else to do is a better thing to ask.
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