Vertex Ventures, the Southeast Asian and Indian arm of the global network of funds Vertex Holdings, recently raised USD 305 million for its fourth fund in September this year. Vertex Holdings is owned by Singapore-based Temasek Holdings.
‘Vertex Ventures SEA & India’ is one of the six different funds that its parent company operates. Four of these funds are geographically focused—Southeast Asia and India, China fund, a US-focused fund, and lastly a fund for Israeli startups. In addition, it operates a global healthcare fund, and a global growth fund.
In India, and Southeast Asia, Vertex Ventures has invested in companies including home service marketplace Housejoy, Southeast Asia’s ride-hailing service Grab, and online travel agency Yatra that went public in 2016, among many others.
We spoke to Ben Mathias, managing partner, and Piyush Kharbanda, partner, at Vertex Ventures SEA & India.
Below are edited excerpts of our conversation:
KrASIA: How have you seen the ecosystem change in India, since you have been investing here?
Ben Mathias (BM): In the last few years we have seen the emergence of many seed funds and incubators in India, which is good for us, because they give us good deal flow. We are seeing a lot of interest from foreign companies that want to come here and acquire local firms. This has boosted exits in the last few years.
In India, we focus on three types of opportunities. One is the consumer internet type of companies which is true for Southeast Asia as well. Second is fintech, and the third is enterprise companies.
Lately, we are seeing many opportunities in the vernacular side. Most internet companies cater to the first 100 million users in India, which are largely English-speaking users living in metro cities. The next 500 million users that have embraced the internet in the last few years are non-English speaking users, who live in smaller towns. The opportunities that we are currently looking at are the businesses aiming to tap these 500 million users from smaller towns.
For example, we just invested in Glow Road, a social commerce platform which is a re-seller company focused on new internet users in tier 2 and 3 cities. So that’s one evolution of business model we have noticed in India. The other sector that is targeting these new internet users is fintech.
Piyush Kharbanda (PK): Traditionally, financial products are sold online to the top 100 million users from metro cities, but the remainder market also needs financial products. These users particularly need products around insurance, savings, and investments.
Traditionally, tier 2 and 3 markets where the next 500 million users are, do not have enough money to save and invest. There is also not much avenue to borrow money from, as they don’t have any credit profile. Virtually all the lenders are metro focused. We are now seeing opportunities in financial services where specific products focused at tier 2 and 3 cities are being created. There is of course a need for education, but more importantly the product has to be at a low cost.
Kr: But isn’t it more difficult to monetize in smaller cities?
PK: When it comes to financial services, the smaller the ticket size of the product, the more difficult it is to make money on that.
Generating revenue is not the main challenge in smaller towns, it is the cost to service these customers. The cost to service in financial services is virtually constant. If you are providing a consumer durable loan for a phone of let’s say worth Rs 30,000 (USD 420) versus a phone worth Rs 5,000 (USD 70), the fixed costs remain the same. Which is why you will never make money on the USD 70 loan.
With the emergence of e-KYC (Know Your Customer), and online payments, the cost to service is going down. So now, fintech companies can perform lower priced transactions, allowing micro-sales, micro-insurance, and micro-loans.
Kr: Since you mostly come in at Series A stage of a company, what are the challenges you see them faced with, and has that changed with the evolution of the industry?
BM: It’s more or less the same. By the time you get to series A, you have to come up with a product market fit. Then it’s the question of scaling the business, and the real challenge at that point is hiring the right team. Because, until then it’s been done by the founders. They have built the product, and have been doing every job themselves. Now they need to build the team, scale the sales, get their chief technology officer, chief financial officer, and build the company for the next level of growth. That’s where we, as a series A investor get involved. If you cross that stage successfully, you are in for the long-haul, but if you make a mistake there, the company will stagnate.
Kr: How much are you going to invest in Indian companies this year?
BM: We have not decided on any fixed number. Historically, one-third of our portfolio companies are from India, and we think this can increase significantly based on the opportunities we discover with the recent fund we raised.
Kr: What are the new sectors that you see becoming big in India in the coming years?
BM: Social commerce is one. I think various business models can be built to cater to the increasing vernacular demand. The other sector we are seeing grow in India is enterprise and SaaS (Software as a service). We just sold one of our SaaS companies, CloudCherry to Cisco. We are actively looking at SaaS companies, and the idea is to find software companies that focus on building products from India, with the ability to scale globally.
Kr: Enterprise companies in India have traditionally been doing better than Chinese counterparts. What’s the reason?
BM: India has one of the largest pools of software engineers in the world, which in itself is a big advantage for India. The other factor is that because Indian software engineers have traveled a lot and worked overseas, they understand how to sell to customers around the world. That’s why we see a lot of success in this space. So the ecosystem has always been there in India for software companies.
In Southeast Asia, enterprise companies are focusing more on local markets, building CRM-based solutions for small businesses, and are scaling well. For example, one of our portfolio companies, StoreHub, that started in Malaysia, has now secured more than 10,000 customers in Southeast Asia.
Kr: In terms of initial public offerings (IPOs), do you think we are lagging behind China?
BM: The actual question is, are Indian companies ready to go for IPOs?
If you are not profitable on a consistent basis, you can’t go for an IPO. There is only for so long that Indian entrepreneurs can keep raising investor’s money. But, after a certain number of financing rounds, they must start earning profits, and if they don’t, that is a problem. If a company’s revenue and loss line keep diverging, then it’s a sign of a problem.
However, to see a series of successful IPOs, we must wait until this current batch of internet companies get to that point.
India and Southeast Asia, are about seven years behind China. In 2012, China bagged about USD 7 billion in venture capital. India last year received about USD 10 billion, which is somewhat similar to where China was seven years ago. Similarly, the ecosystem challenges that we are seeing today in India, and Southeast Asia are similar to what Chinese companies faced seven to eight years ago, in terms of shortage of talent, and getting enough investors to participate in follow-on rounds.
PK: The mega-IPOs that you saw in China between 2014 to 2016, we will see those coming out in the next three to five years. It’s important that the internet companies start focusing on profitability and positive cash flow. Because many companies in China were very profitable when they went public.
Kr: Temasek-owned venture debt fund InnoVen Capital is quite active in India, and the venture debt market in general is also quite big here compared to Southeast Asia and China. Why is that so?
PK: InnoVen has started placing a lot of bets in Southeast Asia as well, beginning this year. The venture debt fund always follows the equity market. The venture debt funds became pretty big in India in the last three to four years, when the Indian market started showing signs of maturity. The phase of capital coming into Southeast Asia is just starting now. In the next couple of years, we will see a few venture debt funds emerge.