Lighthouse Canton Insights Podcast - Ep 2: Diving into India's Private Market Landscape

This podcast was recorded on 14 March 2023 and was prepared based on the information available on the date of recording.

In this episode, we dive into India’s private markets. Together with Sohil Chand, Founding Partner & Chief Investment Officer, LC Nueva Investment Partners, a veteran in India's venture capital landscape and former head of Norwest Venture Partners in India, and Sanket Sinha, an investor in private markets since 2011 who now heads the global asset management business at Lighthouse Canton. We begin by discussing the long term structural trend of India's VC market, the catalysts and factors bolstering this trend, how investors should be evaluating their investments under the current market conditions before exploring the roles that artificial intelligence and technology will increasingly play in the coming years in this emerging market. 

Listen to our podcast now to find out more! 

Transcript

Lighthouse Canton Podcast - Ep 2 Transcript

Intro
Hello and welcome!
You're listening to the Lighthouse Canton Insights Podcast. This series is brought to you by Lighthouse Canton, a global investment institution that provides wealth and asset management services to accredited investors. Here on this podcast, we'll look to shine a light on the market developments and share strategic insights to help you navigate the global investment landscape. In each episode, we'll be bringing new conversations from leading experts in various views, including Lighthouse Canton's own investment team and specialists.


This podcast was recorded on 14th March 2023 and was prepared based on the information available as of the date of recording. Please stay tuned for the important information at the end of this episode.

Podcast
Hello and welcome again to the Lighthouse Canton Insights Podcast. In this episode, we'll focus on the private market investments and take a closer look at India's vibrant startup ecosystem.
In 2021, reports show that private markets fundraising rose by 20% to 1.2 trillion US dollars. This rate has held steady with 639 billion raised globally in the half of 2022, and yet despite the current macroeconomic condition, organizations and agencies are forecasting that AUM and private markets will grow by at least 7 to 8 trillion US dollars by 2027.
Now, if we look at the geographies where this capital is allocated to, we'll see that
just over half of that AUM besides in North American investments, with Europe coming in at 21 % and Asia at 22%. Just five years ago, Asia's AUM was only 60% of Europe’s, and it has caught up significantly, and we believe that this trend will continue.
We're seeing promising growth indicators across Asia: favourable demographic trends, high internet penetration and a burgeoning internet economy, as well as strong government support across the region. India in particular has captured the attention of many institutional and private capital investors. In 2021, we saw it rise to become the third-largest startup ecosystem globally behind the US and China. In recent years, India's startup ecosystem has witnessed a boom. Over 20 billion US dollars was invested into the country in 2021, which was about 5% of global venture capital deal falls.
And at the end of 2022, there were 1,205 unicorns globally with nearly 10% of them hailing from India.


So today, we have with us, ex-Norwest Ventures and VC veteran, Sohil Chand of LC Nueva Investment Partners, as well as Sanket Sinha, global head of asset management at Lighthouse Ganton to share more on India's venture landscape.

Welcome, Sohil and Sanket. How are both of you today, and thank you for coming on today's show.

Thanks a lot for having us.


Thanks for having us. Jovial to be here.


Great to have you both here. So, you know, before we begin, do you want to give us a bit of your background about yourself, what you do? Sohil, we understand that you're a bit of a veteran in India's VC landscape. You used to be head of Norwest Venture Partners in India, and you were previously at Goldman Sachs, where you practically built the India PE business.

Yes, that's right. So I've been investing in India's private equity and venture ecosystem for almost 20 years now. As you mentioned first at Goldman Sachs and then at Norwest, where I ran around the India business for them. So I've seen sort of and invested in sort of many, many startups across the cycle ,from sort of really early-stage businesses that we started, and to even later-stage unlisted companies. With the LC Nueva fund, which I set up along with Lighthouse Canton, what we're doing there is focusing on really early-stage businesses, so pre-series A's and some select CDDA kind of businesses and giving them the capital they need in order to grow significantly.


So our thesis is about just picking, sort of, really good teams, which have sort of demonstrated that they have a viable business plan and shaped some revenues, built a product, and they need money to scale that product and get to sort of institutional venture capital or private equity round. And we make that bet in them.
Our typical check size is the bottom million dollars and the fund is about a 45 million dollar fund. We're targeting to do about 13 investments, a little over 13 investments in the fund. So I'll stop there, Samantha, maybe let Sanket introduce themselves and we can talk more.

Thank you, thank you, Sohil. Hi everyone. As far as my background is concerned, I started with Edelweiss Capital in India, investing in public markets. Sometime in 2011, I moved over to private markets with Deutsche Bank and have been investing in private credits since then. I've been with Lighthouse Canton since 2018, overlooking the asset management business. And at Lighthouse Canton, one of the strategies that we run on the private investment side is our venture debt strategy.


As part of the strategy, we essentially lend to companies which are mid-stage tech-enabled companies, typically series B, series C kind of companies, who have viable business models, who are on path to profitability, and who have the ability to emerge as segment leaders within the sectors that they operate in.


Our venture debt strategy focuses on the Indian startup ecosystem as well as the Southeast Asian regional startup ecosystem. And this is a recently launched strategy, investment strategy, and we have been running it for a couple of quarters now, successfully.


So Samantha, let me just take a pause here and hand it over back to you.

Sure, so it sounds like both of you are very well-versed in the private markets across India. And over the past decade, we've seen PE, VC and investments grow tremendously. Now, according to EY report, 2011 to 2020, saw a compounded annual growth rate of about 19%. So in both of your opinions, can this growth be sustained? What are your views on the long-term structural trend of India's VC market, and what are some of the catalysts and factors that are supporting this trend in your view?
In my opinion, we are at the tip of the iceberg. So the Indian startup ecosystem, in a sense, I would say the earlier funds came in the 2000s, and you know it took a while for the ecosystem to build out for people to get comfortable. For entrepreneurs also to start understanding how to deal with VCs, how to raise money, how to build businesses over time. And that's taken a while, right? Now, the pandemic was a huge accelerator.
The lockdowns that they were sort of capitalized people's adoption of technology. And since then, we've seen sort of a massive increase in people going online and competing, whether it's for shopping, business, other things, and really becoming more tech-enabled, and we're seeing that across the economy from top to bottom.


So coupled with that we have also been having an explosion in digital infrastructure in India. We have some of the cheapest sort of data rates in the world. Very good. A very good data network has been built out. So most of the country has good sort of internet access.


And on top of that, there's also been a huge digitization of our financial ecosystem with things like UPI, and everyone having sort of digitized access to their bank accounts. So a combination of all these factors has started to drive the growth of the tech industry, I'd say in India, and as I say, we're still very, very early in our development part. India’s still a relatively poor country. We have ways to go. The tech revolution will enable that.


I think you're going to see sort of a multiplier effect in a number of new companies and interesting businesses that they've created in this entire space. And over the next, I would say 20? 15 to 20 years? I think we're going to see a lot of very, very exciting developments in the Indian sort of startup ecosystem.


I agree with most of what Sohil just spoke about. I believe that we are still in the early days of chiral uptrend that the Indian startup ecosystem is witnessing as we speak.
I would say the early startups, maybe 15, 20 years back, if you talk about the tech-enabled startups. The first unicorn India got its first unicorn sometime around 2010, 2011! And by the end of 2022, India had 100 plus unicorns.

We believe that as far as internet penetration is concerned, there's still a long way to go.
As we speak, India's digital penetration stands at circa 50 odd per cent, which means that almost 750 million people in India have access to internet, and there's another 750 million people to go.
India has got superb digital payment infrastructure. India does close to 7-8 billion transactions every month as far as digital payments are concerned, by the 750-odd million people who have internet access, which means that every person is doing close to 10 transactions a month.


And this number, 7 billion transactions taken together is more than what US, UK, France, Germany does on a monthly basis. So what has happened is that with digital infrastructure, with solid digital payment networks, a large part of India's Tier Two, Tier Three, Tier Four markets have gotten unlocked, which the young entrepreneurs are now able to access. Almost 65% of India's population lives beyond Tier One cities, which are typically these cities with populations of less than say half a million. And most of the digital commerce orders which are being recorded now are being recorded from cities which are beyond Tier One. And we believe that there's still a lot of unlocking to happen.


Now that's on the demand side. On the supply side also, what has happened is that the societal acceptance as far as entrepreneurship is concerned in India, has gone up considerably over the last decade or so. I mean, 15 years ago, 20 years ago, when some of us were coming out of colleges, there were very few people who were getting directly into entrepreneurship. But if you go to any top engineering school in India, or for that matter, you know, any top university in India, a lot of people are looking at entrepreneurship as an opportunity right from the start of their careers.

Now that's happened because the society has started to accept entrepreneurship as means of living. India is also churning out a large number of skilled technical workforce on a yearly basis. India produces close to one and a half million engineers a year. And that's a big number.


So all these factors taken together are catalyzing the boom of the startup economy in India, and I believe that this trend is there to remain, and it's going to be there over the next decade as they say, you know, belong to India, and I believe that the startup ecosystem is going to emerge as a winner.


Right now there are global macro headwinds, which is kind of, you know, causing some kind of volatility as far as this ecosystem is concerned, but we believe that the structural uptrend remains intact.
Yes, Sohil, I can see that you're both quite bullish on India's private markets and Sanket, you did allude to some hit wins that we might be facing, so 2022 was the year of market corrections. And you know, this quarter, we've had a lot of funding slowdowns and fundraising issues. So are you concerned about the town downturn, and are you guys making any changes to your portfolio approach?

So Samantha, look, I think our investing philosophy doesn't really change, no matter, you know, what kind of market you're in. At the end of the day, we look at investing in good companies, companies who are on path to profitability, companies who we believe can emerge as leaders in their segments, and that remains true across different business cycles.


What is happening right now with corrections in the market is that the deal flows have become much stronger, because a lot of deals which were being printed say, you know, 12 to 18 months ago are not happening anymore. The cheque sizes have become much smaller. If at all, therefore, the deal flows, particularly on the venture debt side has increased substantially. And we are getting a lot of high quality companies who are looking at debt capital. Given at these valuation levels where there has been a correction, they are not very keen to dilute. And that's true for most founders who are running like in good quality companies.


So our rejection rate has gone up, which means that you know, out of every 100 transactions that we are looking at, we are rejecting more number of transactions than what we were doing, you know, six to nine months ago. So that is something which has changed, but the investment philosophy remains the same.


Yeah, I would agree with what Sanket is saying. Though we invest like, currently in the equity of businesses, in equity rather than venture debt, sort of the market dynamics are pretty similar. You know, good companies are continuing to raise money. But having said that, of course, there is a slow-down in deals are taking longer to happen, and valuation, sort of expectations are moderating downwards. But arms are still well capitalized. People do have money to invest. So I see there's a little bit transient. I think there will always be appetite and demand for good companies. Now what constitutes a good company that definition is also changing a little bit.


In the past, the focus was very much on growth, growth, growth. Growth at any cost. And now I think we believe in a more holistic evaluation of business, which I don't think is bad, where investors certainly want growth, but at the same time, they also want to see a path to profitability.


Sure, and you both mentioned earlier on, you know, that the funds that you look at the focus on early-stage and growth start-ups. So can you tell us more about the investment sectors and the types of companies that looked attractive to you right now? You talked about investing in good companies, and when you look at investing against the current backdrop and choosing these types of companies and founders to work with, what has been your approach?

So look from our perspective, our approach hasn't changed very much from when we started the fund. And we did start investing when the environment was already difficult. But just philosophically, we believe number one in backing good entrepreneurs. And by good entrepreneurs, I mean, people who have solid educational backgrounds, who have good work experience, who are organized, who have clarity of thought and vision. And you know, I think that should be true in any market, the entrepreneur and the founders that you're backing are the most important part of the business, especially when you come in at the really early stage because these businesses do go through multiple limits, so it's founder first.
Secondly, we want to - so our philosophy is ‘Go early, but not too early’. And by that, what we mean is we want businesses which have validated sort of unit models, whether if there's a product that's being sold or the product is actually being sold, there's some uptake, were we able to track sort of whether users like the product, what are the repeat rates, etc., right? And if it’s a service - the same thing.


And number three, we want to see really, really solid unit economics and a path to profitability. In this funding environment, we are pushing all our investing companies to get the cash flow break even with the money they already have in their accounts or at the most with very small additional fundraisers. I think that's something that's really important in this environment. I mean, obviously, aside from this, there are multiple other things we looked at, but these are, I would say, the most vertical.

Yes, I agree with Sohil. There's a slight difference in our approach because, by the time we go into a company with our venture debt offering, you know, these companies have reached mid-stage. I mean, these are not “growth” growth-stage companies, but between early stage and growth stage, and they have a proven product market fit. So this model becomes extremely important; unit economics becomes extremely important. We like companies which are already breaking even at least at unit level, if not at corporate level.

In fact, as we speak, almost 50 % of our companies are profitable at e-bit level, corporate e-bit level - 50% of the companies that we have in our portfolio. Therefore, proven business model - that's something which is important. Good unit economics is important. Founders, needless to mention, it's extremely important to have good founders with strong execution capabilities and the ability to navigate through tough markets. Tough markets can come at any point in time. COVID was a classic example. Therefore, it's important that founders have the resilience to see through bad days.

And lastly, when we talk to our founders, it's very important for us to have a conversation where we tell them that, “Look, if all the money that you have is taken off the table, would you be able to run your company profitably or not if we don't have a growth mandate?”


If the founders believe that they can do that, and if we believe that the founders can make that happen, that's the right kind of company for us to invest. And these kind of companies, you know, we find across multiple sectors in India, whether it's health tech, whether it's supply chain-focused businesses, certain fintech lenders. So we are investing across multiple sectors. But these are the core things that we look into in a company or the founder slash founding team before making our investment decision.


That's really interesting to hear. So the current environment hasn't been entirely conducive where obviously at a point where funding is slowing down, and the road ahead doesn't look particularly bright. What would be your advice to portfolio companies as far as business growth, funding and other operational aspects are concerned?


So look, I think it's spoken about it a lot in this conversation. And in times like these, it's very important for companies to start focusing on profitability, even though they may have to compromise on the growth mandate a bit - it's fine, but profitability mindset is extremely important. We are asking all our companies to reduce costs; if the companies are not already profitable, then it's very important for them to increase their runways.

And that's not a discussion that only we are having. It's a discussion, which is being done across multiple boardrooms, whether else you mentioned it, find us there or not. So increasing your runway, managing your working capital better - these are some of the things that we are speaking about. And as I said, some time back, one of the conversations that we are having with our founders is that if you don't have to grow, can you turn your company profitable if you're not already profitable? And what do you need to get there?


We are asking all our companies to come up with a plan to get to profitability if they don't have to grow. So these are the kind of discussions that we are having with our portfolio companies as we speak.

Yeah, that obviously resonates for us the main conversation we are having with our portfolio is to just “reduce, reduce costs”. We're doing a line item exercise and seeing where it's possible to cut, and these companies often have a lot of slabs, so there are cases to get to break even. We are focused on working capital optimization. And essentially, we want to get companies to break even between the capital they have in the bank. As growth comes down as a result, that's okay in this market. We think growth is secondary to profitability.

That was kind of in the short term, midterm, and if we go back to the longer term picture for the private markets industry, this is going to be our final question for both of you: What you say is one investment trend you see picking up across the private markets of the startup ecosystem next say three to five years?

A lot is being talked about, you know, chat, GPT, AI, etc., and I believe that, you know, India is catching up to the whole AI trend. I'm really looking forward to, you know, path-breaking innovation coming out of India, as far as application of artificial intelligence, you know, across different sectors is concerned. AI has multiple applications, you know, it could range from innovation, it could do to servicing, to providing solutions, etc. And when it comes to a country like India, which I believe is the right kind of market for AI-driven solutions, given the huge population that India has, and the fact that you know, the cost of servicing an incremental client can increase disproportionately as a percentage of revenue.
Therefore, it's time that you know, AI-driven solutions come up, and I believe that AI-driven solutions would be the key to reaching out to such incremental clients who are part of tier three, tier four, rural economy in India. And therefore, we expect that the whole AI-backed industry would grow more popular over the next decade. So if you ask me about the long-term trend, I believe that you know, we expect some path-breaking AI-led innovation happening in India or coming out of India.

Yeah, I think Sanket’s take’s a good thing. AI is definitely going to drive a bunch of innovation in India and what we see. But you know, India just across the board, there's so much to be built. As I said earlier, we are a poor country. You know, there's just innovation happening across the scale, and it's not always obvious where this innovation comes from.

So for example, on the payment side and on the whole FinTech ecosystem, the government did a phenomenal job just getting, getting UPI sort of unified payments underway, which enabled basically peer-to-peer transfers. And that's led to a spade of innovation in FinTech. I mean, if you look at our portfolio, that's been sort of the number one area we are investing in, and we continue to see many interesting businesses coming out of this sector, and many of these businesses can only be built in India, given the financial infrastructure that we have.


We've seen a number of sort of space-oriented startups come out in India, and we think that's something that's going to get - that's going to see resilience and further development. I agree, as a sector it’s one where there's a massive amount of disruption waiting to happen. So again, on the five-year, five- to ten-year view, I think the entire, I think, industry in India is going to be transformed by innovation and what these startups do and some and of course, it'll marry a lot of these teams. There will be there'll be an AI component to it. There'll be Internet of Things (IoT). There'll be all kinds of - there'll be a FinTech angle. So but you know, all those, those new emerging technologies will just combine together to disrupt the entire industry. And we're really excited to see that happen over the next few years.


Yes, indeed. I think, you know, the future looks quite interesting, quite bright. We're looking at a lot of digital trends moving, you know, the market forward. So, thank you, both Sohil and Sanket, for sharing your insights today with us on the private markets, the sort of, structural trends, the causes and factors, and how you approach investments in the private market sector in India. Thank you again for joining us and taking the time to share your insights with us, Sanket, Sohil.


Yeah, thanks so much. It was great speaking with you. Thank you for having us.


Thank you once again for having us. Pleasure speaking to you guys.

Outro
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