At a time when some of the world’s largest venture capital (VC) firms, including Sequoia Capital and Y Combinator, are sending out notes to their portfolio companies to prioritise profitability over growth, Rocketship VC’s Venky Harinarayan is advising portfolio startups to stay put on growth.
Harinarayan is a former entrepreneur who co-founded Junglee and Kosmix, two data-focused companies that let users hunt products online. They were later sold to Amazon.com and Walmart Inc, respectively. Harinarayan started the early-stage VC firm, Rocketship VC, in 2013.
Harinarayan has seen the boom and bust cycles of 2000 and 2008 before starting Rocketship VC. It has invested in unicorns like NoBroker, and Moglix, in as many as 20 Indian startups.
Globally, the US-based VC firm has invested in 50 companies. Its biggest bet, to date, has been Facebook or Meta as it’s called today.
Edited excerpt from an hour-long chat with Moneycontrol.
Q: What do you think about the current funding environment? How is Rocketship dealing with the downturn? Are you also being cautious and pulling back your investments?
A: We definitely think there is a change in the funding environment over the last, I would say, 2-3 months. We are actively looking for opportunities but our bar is high at this point, because, at some level, we are all flying a little blind in terms of where things will settle and what the picture looks like.
So, you know, we have to adjust the bar in terms of what we invest in. It (the bar) gets much, much higher, so we have to have a huge amount of conviction about the business and valuation and all of that. But we continue to talk. We continue to invest very actively.
Q: You have had conversations with Indian founders. What are the things that really stood out in these conversations? Are Indian founders less worried than their US counterparts?
A: They have a good reason to be less worried, because, like I was saying, they have raised money at Silicon Valley valuations and Silicon Valley dollars. The money raised has been very high, but the cost structure is significantly lower than a typical Silicon Valley company. So, most companies we've talked to are sitting on huge cash reserves.
Typical runways are like 3, 4 or 5 years. So they have the means to ride out this downturn.
But like I stress to the companies I talk with, you have a period here of 3-4 months as you right-size the shape, get things in order, and sort of recognise the new environment. So, you're playing defence for the next 3-4 months, but then you have to have to go offensive because these are times in which you can win market share, you can win markets and you can come out as market leaders.
So it's important we recognise that there are opportunities that companies can grab. Since you have a lot of cash reserves, it almost makes it incumbent that you go aggressive.
Q: Can you give us a sense of how much Rocketship VC has deployed so far in India?
A: My numbers are approximate. I don't have it at the top of my head. So we're investing across three funds, and we've invested around somewhere between 40 and 50 million in 20 startups.
Q: How much more do you plan to invest in India?
A: We don’t have specific plans. We will let opportunities guide our investments. So, if we see a lot of interesting opportunities in India, we will be very aggressive.
Q: Can you give us a sense of the sectors you would over-index on and the sectors you would stay away from?
A: We are going to let the data come to us. We don't come in too much with preconceived ideas. We have found that whenever we do that, we are quickly humbled by data.
So, what we think is happening right now is that there’s a sort of a consolidation in the market. Companies are slowing down growth and managing their assets and right-sizing their shapes and all of that.
We believe, in the next 3-4 months, we will start to see some green shoots emerge, and we'll start to see growth again. We're very excited to see what sectors would grow. We are being very open-minded and not coming in with pre-conceived ideas.
We want to see what we would grow and we want to be surprised. The greatest investments are the ones where you're surprised.
Q: How would you characterise this downturn compared to the previous ones?
A: All the happy times are the same and all the unhappy times are unhappy in their own ways. So we think every downturn is different and there are some basic playbooks that you can use. How long it's going to be, how painful it's going to be… I don't think anybody has a clue at this point.
So I think you just have to try. You can't play all defensive. Like I said, you have to find a way to play offense and you have to hope that the world meets you where you are and you get to the other side.
But be more cautious with cash, recognise where the world is at right now and then go on the offense. That has been my playbook and that's what I tell portfolio companies.
Q: Early-stage investments are on the rise. How do you look at competition in that space from a VC perspective? What is your strategy, especially with bigger and aggressive players, like Tiger Global, coming into the space?
A: Typically, when you have the public market going straight up, what you see is an explosion in late-stage investing. A very simple way to think about it is that buying a pre-IPO company is equal to placing a very leveraged bet on the markets.
Obviously, if you're playing the markets with leverage, the late-stage guys get hammered first, because the markets go down. Early-stage players tend to be a refuge and so people start to come back to them. I don't think that the early-stage is getting overcrowded.
I think most people have paused and are being very slow. But when they look at opportunities, they jump on to them. It is at an early stage.
The challenge is that if there are no-late stage investors, what happens to all these early-stage companies? Somebody has to fund them at some point. So you know, we need the market to get back to being more normal at some point in time.
Now it's a little disruptive and that's why I said we are all flying a little blind. Everything is, sort of, in transition and change, but hopefully over a period of time, things will settle down into something that's more workable.
Q: Tiger Global has said it will invest more at early stages. VC funds like Sequoia and Accel, which invest at early stages, have raised large funds. Has it affected valuations? Are valuations getting inflated in the early stages because of the propensity of the capital?
A: Right now? No. I don't think it has, but it might in the next 3-6 months. Now most people are happy sitting on their hands. So we're not seeing crazy bidding wars for early-stage companies. I think it's really, getting people off their butts and actually making investments. That may be where we're at right now. So it's not like there's a huge amount of competition.
Again, like I said, that might change in the next six months as people get more comfortable and more confident about investing. Then, maybe you do have more competitive situations, but right now, it's not very competitive, at least from what we've seen.
Q: Last year, growth was the priority for startups. This year, we are seeing everyone suddenly talking about profitability over growth and conserving cash. How do you look at it? What advice would you give founders?
A: You have to get growth. Growth is like the lifeblood of a startup. If you don't have growth, you die. So, you can go for a short period of time when you're worried about profitability and all that, but as a startup, if you don't grow, you might as well be dead. So you have to figure out how you grow.
