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It’s ‘lucky’ to be a Series B and C investor in India: Q&A with Pankaj Makkar of Bertelsmann India Investments

Written by Moulishree Srivastava Published on   8 mins read

BII’s investors seek outstanding entrepreneurs first, then dive in to learn about their sector.

Bertelsmann India Investments (BII), one of the first investors in the country to focus on mid-stage startups, has been involved in the country’s startup scene in the last seven years, watching it take root to become the world’s third-largest network of tech entrepreneurs and investors.

BII is the India-focused fund of Bertelsmann Investments, the global venture capital arm of the 185-year-old German conglomerate Bertelsmann SE & Co. Established in 1835 as a printing and publishing house, the group has grown to become one of the world’s largest media conglomerates, with operations across 50 countries. In 2019, it churned out EUR 1.1 billion (USD 1.24 billion) in profits on the back of revenue of EUR 18 billion (USD 20.26 billion).

It comes as no surprise that Bertelsmann Investments has poured more than EUR 1 billion (USD 1.13 billion) into over 250 startups globally through its four corporate venture capital funds since 2012, with returns in excess of EUR 600 million (USD 675 million).

In India, the conglomerate has invested in 14 startups and at least two early-stage funds through BII. In an interview with KrASIA, Pankaj Makkar, managing director of BII, talked about the perseverance and understanding it takes to be a Series B and Series C investor in a complex market like India. According to Makkar, these investment segments have gone through many ups and downs, forcing a good number of mid-stage investors to retreat from the country, which is what has made this space enticing for the firm. Makkar also said BII won’t change its outlook toward India even if there is an issue with the economy for one or two years, as its strategy includes a longer horizon of over a decade.

The following interview was edited for brevity and clarity.

KrASIA (Kr): What is your investment philosophy for the Indian market?

Pankaj Makkar (PM): When we started Bertelsmann India Investments in 2013, we were the first Series B, Series C—what we called as mid-stage—investors in the country. There were people who were investing across all the stages, but there was no dedicated mid-stage investor. We started focusing on that stage, and we continue to be among the top Series B, Series C investors in the country right now. We invest in anything that has a significant technology advantage in it, whether it’s e-commerce, fintech, digital media, or education. We are primarily focused on B2C, but we also invest in B2B companies that serve smaller enterprises.

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Kr: Apart from direct investments, you have also invested in several early-stage Indian funds like Helion and Nirvana. What is your strategy behind these moves?

PM: As far as our fund portfolio is concerned, those are investments that we made in the very beginning when we came into the country. That was fundamentally done from a perspective of building an ecosystem, partnering with like-minded funds, learning from them, and then applying the knowledge to our core business, which is our direct investment portfolio. We have done the same in China, Southeast Asia, Africa, and the United States, so it is consistent with what we have done globally. But that was the first step. The main business that we built after that was a direct investment practice, which is now under BII. We have the mandate to invest in funds, but we only do it if it gives us a strategic advantage. We deliberately invest in only early-stage funds so that they don’t compete with our core business.

Kr: What did you learn from the funds you invested in initially?

PM: We got to learn a lot from them—their style and what type of deals they get excited about. In fact, one of our very good investments, [e-commerce logistics firm] Shiprocket, was a portfolio company of our investee fund Nirvana. So from the deal flow to learning to use their network, we were able to leverage that in a very positive, two-way relationship.

Kr: Bertelsmann Investments has made more than 250 investments across the globe. Do you have a different strategy for India? And how does India compare to other markets?

PM: As far as India is concerned, our mandate is the same as other geographies: Invest in technology-led companies. But when it comes to the stage of investment and the ticket size, that differs depending on the situation on the ground. In India, we are a Series B, Series C fund. In China, we are covering everything from early- to late-stage. In the US, we are happy doing early-stage deals. In Brazil, we do late-stage investments. Different funds focus on different stages. There are differences in the execution of strategies, but the sectors we are interested in remain the same.

If we compare India to Southeast Asia, the latter is a fairly nascent [startup] market. What’s happening there is what was happening in India in the mid-2000s. Of course, it will pick up speed in time. China is almost ten years ahead of us, so India is in between China and Southeast Asia.

Kr: Why did you choose not to invest in early-stage startups in India?

PM: Because there’s a lot of competition among early-stage investors in India, unlike within other geographies. We don’t want to go into a very crowded space. Furthermore, we are highly successful in the mid-stage segment, so we don’t feel the need to change our strategy.

Pankaj Makkar, managing director of Bertelsmann India Investments. Courtesy of Bertelsmann India Investments.

Kr: How has the Indian startup ecosystem, particularly in Series B and Series C space, evolved over the last seven years?

PM: The startup ecosystem has become a lot more mature compared to when we started. The quality of entrepreneurs and the business models they are putting together have become stronger. From my perspective, it is a good time to be in India as an investor.

As far as the Series B and Series C space is concerned, it has followed a wave pattern. There were some points when there was nobody making investments in the space, like in 2014. Then, in 2015–16, a lot of hedge funds came and did Series B and Series C investments. And then in 2017–18, they pulled back, thinking it was a bad space to be in. In 2019, they started up again. In 2020, during the COVID-19 pandemic, they have again stopped pumping in money. So this is a problem in Series B, Series C. A lot of people keep coming and leaving, which is why it becomes very difficult for startups to raise money consistently at the Series B or C level.

And that is why it carries value for us, honestly. For us, we’re quite lucky to be in this segment because whenever other investors clear the space and run away, we find an opportunity to invest and get some really good companies.

All these years, we have seen a lot of [Asian] funds entering the Indian market, but as of now, it is too early to say whether they will survive India and understand the complexity of the country.

Kr: Over the last seven years, you have cut checks for 14 startups. Have you kept the pace of investment deliberately slow?

PM: When you look at the pace of investment of Series B and Series C investors versus a Series A investor, they will always do fewer deals, and thus they look slower.

When we started, we were doing fewer deals. But in the last three to four years, we have done a fairly adequate number of deals—anywhere between two to four deals a year, which I think is a very good pace for mid-stage funds. You can’t compare the pace with that of early-stage funds because they put small check sizes into ten deals, while we put large checks into fewer deals. Given that we are paying higher valuations, we cannot afford failures.

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Kr: What are the sectors that you are excited about right now?

PM: We are not excited about any sector. We don’t have a sectorial view. We don’t try to take a top-down view of identifying the sector first and then finding entrepreneurs. We take a bottom-up approach of finding entrepreneurs and then understanding the space. And if we find it exciting, we invest there. That’s the reason why we have a diverse portfolio.

Kr: What are the key criteria for you to invest in a startup?

PM: We want the entrepreneur and his or her team to be A++. We want the product to be already the most amazing product in the market with an established user base. And we want the market that the product serves to be extremely large. Our assessment is whether the company will continue to be the leader for the next five years, besides the macroeconomic situation of the economy and the exit opportunities that a sector presents.

Kr: Do you see any specific trends in India’s ecosystem that you think may catch on in the future?

PM: Anything that leads to contactless delivery of products and services will do extremely well. E-commerce, if done in a touch-less fashion, and all the enablement sectors around it, like payments and logistics; online education where there is no contact happening between the teacher and the student; and pharma [medtech], given that it is playing a big role in COVID-19—these are all good sectors that will enjoy tailwinds from the crisis. These businesses will grow a lot faster than others, which have a significant physical touch component to their business. So, we will continue to watch them.

Kr: What have been your key lessons in the last seven years? And what is your strategy going forward?

PM: People don’t recognize this often, but India is a fairly complicated market. There are various states and various languages, and hence the execution of business models is a very, very difficult task. The execution of similar business models in markets like the US and China is a lot easier. Given that there are so many venture capitalists from Southeast Asia, China, Japan, and the US, apart from the strategic investors from all over the world, it’s a pretty crowded market. The competition level in a lot of categories is very, very high.

I think the companies that will eventually end up winning are the ones that have a significant advantage over competitors while building their business in a market like India, where execution is difficult. Now, that competitive advantage is not seen in most products. Therefore, our strategy has always been to focus on the competitive edge of a company.


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