Mohanjit Jolly, DFJ India: “India’s still a very ‘roti-kapda-makaan’ type of investment economy.”

Mohanjit Jolly needs no introduction. As Managing Director of DFJ India (one of India’s leading VC funds today), he set up the Indian operations for DFJ in 2007. Currently, he manages an enviable portfolio which includes blockbuster companies like Cleartrip, MChek, Seventymm, Komli, Attero and many more. In this freewheeling chat with YourStory, he speaks about the interesting business ideas that he’s been evaluating and the changes that he has seen in the startup ecosystem over the last few years.Mohanjit is also one of panelists on for the ‘Health, Water & Sanitation’ panel at Sankalp 2011, an Intellecap initiative that catalyzes impact investments into sustainable, scalable businesses globally. To know more about Sankalp, read YourStory’s interview with K Sree Kumar, CEO, Intellecap by clicking here.

What is the agenda for DFJ India in 2011? What are the sectors you’re most excited about?

I think that the funnel is looking incredibly robust. The companies fall into the ‘traditional’ sectors that DFJ globally tracks which is primarily consumer media (including consumer internet and mobile innovations) and clean tech. On the clean tech front, we’ve filed a term sheet and hopefully, we’ll be able to make an announcement about an investment in the not-so-distant future. We’re seeing some very interesting and very strong IP-centric companies that fall outside of these two traditional DFJ domains, with one of them being in the life sciences area.

Life science is a space that DFJ has made investments in. In the US, for example, we have invested in companies like Synthetic Genomics and Genomatica. But DFJ hasn’t done a life science investment in India. We’re looking at it very closely. Whether we come to the finish line is something that remains to be seen. But primarily I would say that the companies are in the consumer-facing technology side and the clean tech side, along with some dabbling in the non-traditional sectors especially life sciences.

A life sciences company would typically require a larger quantum of investment when compared to a consumer tech startup. So, are you looking at a bigger ticket size in terms of your investments?Actually, no. This one’s different in the sense that it is a team from the US that has effectively come to India with a great deal of expertise. So, it’s not a capital-intensive model.  It’s not a standard pharmaceutical deal, with stage trials, FDA approvals and that sort of thing. It’s from the cosmoceutical side rather than the pharmaceutical side. What’s interesting is that they have an IP-centric approach which, honestly, is not something that we see in India. A patent portfolio is what we are looking at, given the team’s pedigree.

From the 2011 roadmap point of view, I clearly see probably two to three investments across the different sectors that I mentioned. We’re doing due diligence on multiple companies and for all you know, the number of investments may be higher. But as of now, it looks like two to three new investments.

What are the three primary considerations that you keep in mind while evaluating a company for investment?

(laughs) I’ll give you a ‘buy-three-get-one-free’ offer. I call them the “3 T’s and the M.” The first T, and this applies to India more so than any other geography that we operate in, is ‘team’. It is an overused cliché. But some of the best times that I’ve had in India over the last three years have been due to teams and the worst times that I’ve had are also because of teams. Team, by far, is the most important ingredient, especially in an early stage startup.

The second T is technology. Technology is proxy for what’s different. In India, as I mentioned earlier, it’s not as much about IP as it is about IT. So, how do you leverage technology? Maybe, you get some expertise on the team to add some supplier or channel relationships to give you that sustainable advantage over the long term.

The third T is traction. Traction, in an ideal world, would be happy marquee paying customers. So, you have revenue coming in and that revenue is growing. In early stage startups, there’s the dilemma of traction and capital. You need traction to get capital and you need capital to get traction. So, if you don’t have revenues, then there’s a whole new spectrum. We try to see whether you have a product or a service.

If you don’t have that, we see whether you have access to production. If that’s not there, we see whether there’s at least a team that has chucked lucrative jobs and jumped on board because they fundamentally have the passion and belief that they’re on to something really big. And we also see whether you’ve surrounded yourselves with smarter individuals, board members, mentors who are lending credibility to your venture, since you don’t have much to show for, apart from a 15-20 slide presentation.

At that point, you may not have the traction or even the technology. But I’ve got to be able to look in the eye of the entrepreneur and get the infection that the individual/s are so driven and passionate about what they’re working on and that they’re going to make it work. That’s what we did, for example, with companies like Canvera and Attero. These were Powerpoint presentations with nothing more than that when DFJ first invested. So, it was that kind of energy and that’s unfortunately something that’s not talked about enough.The M that I was speaking about was the market. The market has to be sizeable for you to be able to create a large entity and this is especially important for a large fund like DFJ. The opportunity has to be large and it has to be worth our while. For someone to put half a million dollars in and get five million dollars out upon liquidity is a phenomenal return. It’s a 10X return. From an IRR standpoint, it’s fantastic.

But for a 350 million dollar fund, a 5 million dollar return isn’t even going to get me a pat on the back. So what one has to think about as an entrepreneur approaching a VC or an investor, is what requirement does the company have in terms of the overall capital and what is the potential payback for these investors over a period of time. And depending on what that equation looks like, I think that the entrepreneurs should also target the investor accordingly. For example, if it’s going to be half a million in and five million out, then it is likely to be a great investment opportunity for a small fund or a seed-stage fund or an angel network than it is for a multi-hundred million dollar global fund like DFJ.

Over the years, you must’ve encountered hundreds of entrepreneurs. What are the traits that you have noticed in successful entrepreneurs?

The one thing that I’ve noticed is that the successful entrepreneurs do not hesitate even one bit to surround himself or herself with people who are smarter than he or she is. I have often seen in India that ego sets in. There’s a sense of ‘I can do it all.’ People want the title and they want everyone else to be subordinate to them. I think that it’s a clear recipe for disaster in the long term. It may work early on when you’re small. But when you want to scale the company from single-digit millions to double-digit millions, you just need a different calibre of management to come in, both at the senior level and at the middle level. And I think that’s where a lot of entrepreneurs fail or actually, go into denial.

The other trait lies in having a monumental vision and not an incremental one. The DFJ logo stands for ‘change the world’ and these entrepreneurs truly believe that they can change the world. And they see a billion dollar company in the making. Again, these types of entrepreneurs are in very short supply in India. Most companies here are happy with single-digit millions and are profitable. That’s great. But that’s not what DFJ is looking at.

Look at it this way. If you’re trying to bring on board senior CXO or COO level person and asking him to leave this multi-crore salary somewhere else and join  your startup, you’ve got to have the salesmanship. You’ve got to have that aura around you. That’s what makes people willing to take a 75% pay cut and join a company because they think that if the gentleman/lady in question is associated with it, they’ll make it happen. That trait is rare. I’ve been lucky to have been associated with a handful of people with that trait in my 15-year career with startups and to have some of them on our portfolio today.

What are your thoughts about impact investing and patient capital?

From an investor perspective, you’re either a quick-fix where we make money swiftly, let’s say, with an exit in 12 -24 months. That pushed you more towards later-stage, private equity side. Or you’re more the early-stage, nurturing type who cares more about the long-term view and is extremely patient with a longer investment horizon.

Clearly, DFJ has been an example of the latter. It’s a little bit of a blended approach in India where we do mid-stage investments as well. But primarily, I would say that there’s an early-stage bias. So, I guess we would be classified under very patient capital.

On the impact investing front is where the personal interest comes through. I picked up three little kids and hauled them halfway across the world for that very word – impact. I would’ve done fine in the Valley and would’ve had a fairly interesting career. But from an impact standpoint, one can have a lot more of that here in India, for a variety of reasons than perhaps in the US.One such reason is the fact that India’s still a very ‘roti-kapda-makaan’ type of investment economy. There’s so much work to be done at the basic infrastructure level to get people, let’s say, electricity. I’m not even talking about reliable power here. I’m just speaking about getting them some electricity, some clean drinking water, some healthcare and education. Unless you get these things in place, the 8-105 GDP growth that we keep harping about is going to peter out.

You need those fundamental, foundational-level investments and mentoring to lay the seeds for this young demographic to actually turn into productive participants of the economy, going forward. There’s no better place than India to start doing this because you’ve got anywhere between half a billion to 700 million people who are living in the rural areas, most of them without electricity, drinking water, etc. These are the facts that push us into investing in a company like D.light which does solar lanterns or Husk which does bio-mass based electricity generation.

In fact, we’ve just signed a term sheet with a renewable energy company. We know that unless you have light, you don’t have education. Unless you have power, you don’t have connectivity.  There are just so many fundamental ‘if-then’ loops. And I think there’s this tremendous opportunity there.

I’m not saying this from a non-profit standpoint. At the end of the day, DFJ is a venture capital fund and we’re looking at returns. I just feel that there’s as much of an opportunity, if not more so, in base-of-the-pyramid applications as it is at the top of the pyramid, which is where the activity seems to be focussed right now. I think that profitability has to be there. And based on the very interesting proposals we’ve been seeing at our desk here, entrepreneurs are clearly thinking impact and profitability as well.For DFJ, a dollar invested in India is no different from a dollar invested in the US. It is all coming out of the same corpus. India does not have a separate fund. India as a geography gets an allocation from the core fund. The process of investing is no different from other geographies. The partnership in the US isn’t going to make an exception to invest in a rural healthcare or clean water type of project here versus something more lucrative in the US on the tech side. When my team puts an investment memo together, we have to make a case for the venture giving the sort of outcomes that we’re looking at, as compared to the other opportunities that they’re considering in various parts of the world.

As one of the frontrunners of the early-stage venture investment space in India, give us your views on the evolution of the startup ecosystem in India over the last three-four years.

One has to look at India, either from a relative lens or from an absolute lens. If you look at India from an absolute lens and compare it to Silicon Valley in US and evaluate it based on the number of startups, number of investors, capital available for investment and all that, it’s very small. In absolute terms, it doesn’t necessarily compare.

A more appropriate lens to look at India with is a relative one. That means you look at how India is progressing, month on month or year on year. And that trend is clearly up. More and more firms have come here, either directly or through partnerships and they’re looking at making investments in India.

Even if you look at the indigenous funds like Helion, Nexus and few others in the early stage environment, they have raised follow-on funds. They’ve raised their second fund and are looking at their third fund. So, clearly there is an increasing appetite amidst overseas LPs (limited partners) to invest in India as a key geography.

Also, the local ecosystem is also progressing and maturing. You have more and more local investors coming into the venture capital/private equity frame.

On the early stage side, I’m amazed by the level of enthusiasm and energy that I see in some of these angel investor forums that I’ve had the pleasure of visiting in Mumbai, Hyderabad and Chennai. All these angel groups are forming and trying to bridge the gap between a raw startup and VC-stage startup. Even though that gap still exists, efforts are being made and that’s always good.

Now, one thing that can’t be stated enough is the calibre of people who are moving to India, either to join startups or start something of their own. That reverse brain-drain (or whatever you want to call it) from the US is clearly happening. And that’s accelerated over the last 6-9 months.

So, in this scenario, what sort of place do you see for social entrepreneurship?

Well, I can give more of the anecdotal evidence. Recently, we’ve looked at half a dozen very interesting social ventures in domains ranging from drinking water and drip irrigation (DripTech) to rural distribution for consumer durables (Frontier Markets) and anti-counterfeit drug solutions (PharmaSecure). And all of them have been started by foreigners. It’s a very interesting trend.

To me, it was mind-boggling to see young people in their 20’s and early 30’s from primarily the US with some peripheral linkage to India find very interesting opportunities that can be addressed through a combination of technology and sheer grit. They want to roll up their sleeves, get into the villages, learn the local language, interact with the locals, understand the problems and figure out solutions around it.

In our portfolio, we have a mobile payments company called MChek and one of the initiatives that we’re looking at is financial inclusion and how we can make a difference in the rural hinterlands. And the person who set that up is a Caucasian lady from Stanford who moved to India and settled here.

This is only in addition to the vast number of locals who have embarked on such ventures. I consider myself blessed to get a bird’s eye view of what’s happening and who’s doing what. I think we’re living through a phenomenal phase in the Indian entrepreneurial road map, from the future-looking-back point of view. Ten to twenty years from now, we’re going to look back and say there were some amazing innovations in terms of products and services that came out of young people starting companies in roughly this timeframe, let’s say, between 2009 and 2011. And this is in the middle of a downturn. So, it only adds weight to the theory where some of the best companies have been started during the worst times.

Do let us know about your thoughts on this story. You can write to us at [email protected].

Sriram Mohan | YourStory | 25^th March 2011 | Bangalore