Kanwal Singh Rekhi is the first Indian-American to take a venture-backed company, Excelan, public on the Nasdaq stock exchange in the US. He co-founded the company in 1982 and was named president and CEO in 1985.
In 1987, the company went public on the Nasdaq, and in 1989, it merged with Novell.
Rekhi, also the co-founder of TiE (The IndUS Entrepreneurs) and trustee on TiE's global board, had long anticipated the global startup funding winter. The 77-year-old Silicon Valley veteran has invested in more than 50 start-ups to date, and led venture financing in at least 23 start-ups where he also served on their boards. Six of his portfolio start-ups have gone public so far, including PolicyBazaar and Nutanix.
He is currently the co-founder and managing director of global investment firm Inventus Capital Partners and Silicon Valley Quad (SVQuad). In an interview with Moneycontrol, the industry veteran discusses the disparities in the global and Indian venture capital and startup ecosystems. Edited excerpts:
You have seen quite a few cycles of downturn in the startup market. How are you reading into the current funding shortage period? What’s different this time? Especially how are things going to pan out in the growth stages?
Every once in a while people come up with this new narrative that money is a commodity, growth is the only thing that matters. But that’s not a sustainable process. The investors eventually have to see their money back in return. You end up having companies, especially in India, that are not profitable and have no prospect of becoming profitable in the future. So what you are seeing is a very necessary correction. Money is not free anymore.
Startups in the growth stage must become more disciplined and moderate their growth. A growth-stage startup with no profitability is nonsense.
Both SoftBank and Tiger Global are not yet comfortable making newer late-stage bets in India. What’s your take?
Tiger Global and SoftBank are the culprits. They are the bad guys. They brought all of this tragedy and then went ‘oh, everything is broken.’ They poured that massive amount of capital.
I expected a slowdown two years ago. I had said this is unreal and won’t sustain. What you see now is absolutely normal. You cannot forever keep on looking for capital without being profitable.
Late-stage money has dried up because it was not properly utilised to give proper returns. Late-stage investors, unlike early-stage ones, are not risk-takers. They are not providing risk capital like seed, Series A and Series B money. Late stage is growth capital but they (VC firms) assumed that the companies are profitable, and they are supposed to expect a return. This is people’s money saved for their children’s education, this cannot be risk capital. This is not play money. But what Son San (SoftBank founder and CEO Masayoshi Son) and these guys did, they made late-stage investing the same as early-stage investing.
Are you seeing a slowdown or a shortage of quality growth stage start-ups at the moment given the poor stock market performances of some of them that got listed last year? What needs to be fixed fundamentally for these businesses?
We were invested in Policybazaar. We had invested about 3-4 years ago, the company was profitable then. Then Son San came in and said, ‘you cannot be profitable, you have to grow.’ Following that, Policybazaar was given a high valuation. At the time, we took that money and sold half of our shares to Son San.
Then, during the IPO, we sold more shares. We are now 75 percent out. The IPO price of Policybazaar was Rs 980, and it is now trading in the Rs 450 range. This is all because of reprioritising growth over profitability.
If a company is not profitable and its stock price crashes, they will need to borrow money. If you are profitable, even if your stock crashes by 30 percent, who cares? You are still able to pay salaries on time.
Has the private market corrected enough in India as compared to public markets or is there more fall expected?
I expect more corrections. In the private market, if money is available to entrepreneurs even at high prices, money is still available. Entrepreneurs must lower their expectations when they don't receive funding, and that has already started to happen. There is more room for correction. I talk to entrepreneurs, they are a lot more reasonable now than they were six months ago.