Fund will have a 10-12 year life cycle, won’t strategise based on the last 6-8 months : Bertelsmann India Investments’ Makkar

In an interview with Moneycontrol, Pankaj Makkar, managing director, BII, discussed his investing strategy for the newly allocated fund amid a funding shortage, e-commerce logistics company Shiprocket turning a unicorn, opportunities in ‘future of work’ startups, looking for timely exits and delays in the initial public offerings of Pepperfry and Lendingkart. Edited excerpts:

Congratulations on adding another unicorn, Shiprocket, to your portfolio.

We’re quite happy with how Shiprocket has performed, it’s one of our favourite companies. I’m very close to all the co-founders, Saahil (Goel), Gautam (Kapoor), Akshay (Gulati) and Vishesh (Khurana). And we backed them way early. It was in 2015 or 2016, some somewhere in that time frame. And over the last six-seven years, the journey has been just fantastic. Of course, they took a couple of years in the beginning to figure out the right product-market fit, which they did probably by 2019 onwards, (and then) it just went like a rocket ship. So we joke internally that we should have called you guys Rocketship rather than Shiprocket.

They always wanted to build e-commerce-enablement services. Now, in the US, if you look at the journey with a company like Shopify, it started by first creating the shopping cart and then went further. In India, Shiprocket started with that offering but very quickly realised that it was a very commoditised offering. So while the general thesis remains the same, what products to sell in India, within that thesis, they experimented. We think that merchants need all of those products, actually, but yes, shipping was a big need at that time. And they continue to kind of build that. That kind of gave them significant success. They’ve acquired a whole bunch of companies now, with the idea to be an end-to-end e-commerce-enablement platform, which I think is the right vision that the founders always had from day one. It’s been an interesting journey, and shows that copycats generally don’t work in India, you have to innovate ground-up from a local angle.

Bertelsmann’s startup portfolio is across segments. What’s your investment rationale?

Our thesis is very simple. We are a sector-agnostic fund. We invest in companies that are either tech companies or technology-enabled companies, Pepperfry would be an example of a technology-enabled company, Licious would be an example of a technology-enabled company. Shiprocket, actually, is a technology company, which is creating software for merchants. So both of these trends work very well for us. I am quite happy that we are sector-agnostic, because by virtue of that we can partner with other ecosystem builders, like Accel and Sequoia and Mayfield, and a whole bunch of other players, Lightspeed and Elevation, etc., and build good quality companies. Of course, over the last 10 years, some themes have taken prominence.

We are super excited with what’s happening on the health side. We made one investment called Orange Health recently, which is fast diagnostics. We thought that was an interesting take on diagnostics, because if you get your blood sample taken, you don’t want to wait for two or three days to get the results. You want to get it ASAP. We were very surprised that nobody had innovated in that space. And this company was doing it, which we thought was really interesting.

Given the tailwinds of COVID, people are generally quite excited about health as a topic. And we see a lot of innovation happening, whether it’s machine learning, AI, market getting consolidated, etc. So health remains a big focus for us.

At the same time, because of the pandemic, ‘future of work’ as a concept is very interesting to us. And within that we announced SquadStack, which is a new way of running a call centre. Instead of having fixed employees in a call centre, can you get the same done through the gig economy, by virtue of that you can give more flexibility both to the workers as well as to your clients. So some of those themes are becoming a lot more prominent for us.

I think one thing that we probably benefit from—and we think that’s our secret sauce—is that by virtue of having funds across the globe, we’re able to spot trends relatively early. We invested in Eruditus, when edtech was not even an interesting theme, in 2017. Similarly, some of the logistics companies like LetsTransport and Shiprocket we picked up when e-commerce enablement or trucking was not a very sexy theme. And I think those three things have worked out quite well for us because five-six years down the line, it does become a big rage. And we hope that some of the themes we are going after now go down the same path.

This week, Bertelsmann announced its second ‘future of work’ startup investment, Awign, in less than a month. What factors led Bertelsmann to pick Awign?

Essentially, Bertelsmann India Investments believes in backing tech companies which are solving the problem of the future. Awign is solving crucial challenges for enterprises along with generating employment opportunities in the gig economy. Awign has the largest and most active base of gig workers pan-India, earning sustainable income through their work fulfilment platform. In addition, they have a proprietary technology platform that allows them to seamlessly create custom workflows for enterprises across verticals. Lastly, the founders come with a deep understanding of the market, with a relentless focus on growth, while maintaining best-in-class unit economics.

Since gig economy workers are largely unorganised, how do these startups get them to join their platforms?

Post pandemic, the world has witnessed a natural progression towards the gig economy due to the flexibility and benefits like being able to work from anywhere. Today, startups are solving the problem of this unorganised sector with the power of technology. We have seen products that are evolved enough to onboard, train and manage thousands of workers remotely. These products are app-based and, hence, anyone with a smartphone and access to the internet can find work opportunities.

With Awign, Bertelsmann has already made two investments in the future of work segment. Will we see more such deals this year? What is your overall outlook and what are the other use cases you are exploring in this space?

With regard to the overall outlook, today, India’s gig economy is worth $20 billion with almost 8 million gig workers, which is truly remarkable. We recognise the tremendous untapped potential for gig work in India as well as the numerous beneficial effects it will have in society.

SquadStack and Awign are the two investments we have made in the future of work this year. We are optimistic about the developments and disruption these startups will bring to the sector, while solving crucial challenges for enterprises.

Bertelsmann has now earmarked some $500 million to be invested in India over the next few years. Has there been any tweaking or upgrades, in terms of investment strategy, as we go through this funding winter?

With the new fund, we have a slightly different strategy. I would call it the previous strategy-plus-plus. So it’s not very different if you just added a few elements to it. Also, the strategy that we put together is not a strategy keeping in mind the last six-eight months, because the fund life is a 10- to 12-year cycle. And we can’t take calls on the basis of one or two years. A lot of our strategy has been keeping in mind what India promises to investors like us over the medium to long term. Now, keeping that in mind, we are of course very bullish about India. It has the right macroeconomic tailwinds and a very robust VC (venture capital) ecosystem. What we have done is, we were pioneers in building a first-of-its- kind mid-stage investing arm, which is Series B and Series C. What we have done is with this new corpus, which is a larger corpus than what we had earlier, we now will do slightly bigger cheque sizes where we think we want to take a larger stake and give more money to the companies to build their business faster, or stronger. That dry powder is there with us to build companies in a very successful and sustainable fashion.

The second thing that we’ve done as part of the strategy is investing in Series A deals on an opportunity basis, because we do think that the ecosystem is mature enough for us to take that risk head on and still build a strong practice keeping in mind that our bread and butter continues to be mid-stage investing, and Series A is more opportunistic.

With early stage market currently being flush with funds from the likes of Sequoia Capital, Elevation Capital, Accel Partners to name a few, will we see a valuation run-up in the early stage, similar to the growth stage that we saw last year?

To a certain extent, it was happening earlier, it has calmed down a little bit now. What you don’t want is somebody getting valued at a very high price. And then later nobody wants to touch that company, because they’ve raised a very high valuation. You know, founders have also realised in this bloodbath that it’s not great to raise money at a billion-dollar valuation when you can’t do the next round. It’s better to raise money at a reasonable valuation, $500-600 million instead of $1 billion, but then showcase growth and get properly valued. So I think our advice to most founders in general is try to go in that middle range. Don’t go very low, don’t go very high. And you are, generally, sorted in life.

What are the average cheque sizes we’ll be looking at right now?

For our core programme, which is Series B, Series C, we typically like to put in anywhere between $10 million and $15 million as the first cheque. And then over the life of the company, we can deploy as much as $40 million per company. For early stages, we start with a smaller cheque. It could be anywhere between $2 million and $5 million. But hopefully, after that the company goes into Series B and C and D, a similar trajectory continues.

A lot of the companies in your portfolio are quite successful. Have there been any exits as of now?

Yeah, we sold Saavn, IndiaProperty and a couple of the smaller positions. And we also took a partial exit from Eruditus. But we still continue to hold a large chunk of it.

What is the expected range of returns?

I think we are still very young in our exits. We’ve just had a handful of that, I think give us another, I would say a year or two to demonstrate actual numbers.

A couple of your portfolio companies like Lendingkart and Pepperfry have been talking of an initial public offering (IPO). Do you see that happening amid the macro uncertainty? Is this happening this year? What’s your outlook?

The right time for an IPO for a company consists of two variables. The first one is, is the company ready for an IPO? The second one is, is the market ready for that company to go fight for it? The good news is that whether it’s Lendingkart or Pepperfry, both are already ready or close to ready for an IPO. Now all we have to do is wait for the macroeconomic climate to improve and then go and list, which is a very normal process that happens every three-four years. We are going through that cycle as and when the markets stabilise. We are in a very unprecedented time because of COVID and the amount of liquidity put into the system to safeguard economies. There’s a massive inflationary pressure phenomenon in India.

Number two, the Ukraine war is not a regular phenomenon. It’s not that very often we have wars in Europe. It has happened after a very long period of time.

Number three, a lot of the supply chain constraints on commodities, etc., are creating further pressure. So I think let that macroeconomic climate on a global level settle a little bit. And I think the IPO markets would rebound, whether it happens in six months or 18 months we don’t know. That uncertainty is not in our hands, what is in our hands is continuing to build the business in a very positive way. And keep the company IPO-ready from a company structure, size and risk perspective, which I think we have delivered in both the companies.

Pepperfry was looking to file the draft red herring prospectus this year?

I think given the uncertainty in the global market, we are watching the situation very carefully. We from our side, internally, are ready, we have made a company which is IPO-worthy.

Will we see these companies go for further fundraises before the IPO?

I think for their core businesses, these companies are set. But there are always very interesting M&A opportunities that come up. And if there are some opportunities that come up, then of course, we will tap into providing capital to these companies so that they can build up much deeper and bigger businesses.

What are going to be your key business focus areas for, say, the next two to three years?

I think the first thing is of course, we have built a very good team now and we are now training them to become fairly active in the market and building new processes so that we can act within the mandate that’s given to us.

Number two, we want to make sure that a lot of our companies which have done extremely well continue to grow, but also at the right time find the right home for themselves, whether it’s an IPO or a strategic buyer, and we exit out of some of them. Exiting a good company does not mean that the company has become bad. It just means that your time that you had allocated for the company is over and now it’s somebody else who should take the company forward. So, I think the second focus would be on exits at some point because we have our vintages in 2013-14.

And number three is, you know, continue to find good quality companies to back in some of the areas that we discussed today. And lastly, at the same time, be a fairly meaningful and a value-added player in the ecosystem and alongside the younger people, continue to push the ecosystem in a better way.