One investor that most people, if not all, in the startup ecosystem have only good things to say about is Bejul Somaia, Managing Director at Lightspeed Venture Partners, India. A few days back, he spoke on social media about the journey of how Lightspeed was the first investor in IEX, a company that recently went public.
We all know venture-funded Indian companies going public is still a rarity. This is a big deal, or shall we call it a big listing, and a milestone for the startup ecosystem. How do we ensure we have more such IPOs? How can we have more investors who take unconventional bets? How do we mature to an even better space as an ecosystem, and, most importantly, what are some of the learnings for entrepreneurs that the IEX story has to offer? With all this in mind, I asked Bejul a few questions, and I bring to you our conversation.
Hope you have some takeaways from below, I definitely had a lot.
Shradha Sharma: You were an early investor - how do you decide to invest in companies that might not be "typical" Lightspeed opportunities? What role does your ‘gut feel’ play in the process? I know you are an empathetic listener, you listen and absorb what others are saying. Does it give you a deeper understanding of companies/people?
Bejul Somaia: It's very easy to project one's biases or preconceived notions onto something before listening to what an entrepreneur has to say. I’ve tried to train myself not to do this. Instead, I listen with an open mind and process what I’m hearing on a first-principles basis.
Many people are quick to stereotype entrepreneurs and/or companies and (often unknowingly) jump to conclusions based on superficial pattern matching.
I just want to listen to the person in front of me and understand fundamental issues such as: Why is he/she choosing to do this? Is it fundamentally a good business? Does he/she have a unique insight and a clear point of view? What’s happening in the market that makes this possible now? What does the path to scale look like? What can get in the way? And so on.
Another thing I try and do is understand the business ‘archetype'. This often requires stripping away a lot of the packaging and getting to the heart of how the business works. Just like people have traits, so do businesses.
Examples of business traits might be capital efficiency, thin margins, and network effects, etc. We’ve learned over time that certain traits lend themselves to building high-value businesses, while others make the journey really hard (and success less likely). As an example, we knew very little about the power industry in India when we first met IEX, but we knew a lot about marketplaces. It was that angle of thought that led us to invest despite the company being presented as a play on the power sector.
I strongly believe that listening and asking questions (vs speaking and offering advice) are absolutely critical to ‘seeing’ what lies beneath the surface. Intuition certainly has an important role to play, and I’ve learnt to tune into my intuition more and more, but I’d still say that being fully present with a curious, clear and open mind is under-rated.
SS: You mentioned team/product market fit/business model/value proposition, etc…many companies get most of that right yet few ever get to an IPO as IEX did. What did this company/team do right, and consistently so? As a board member did you observe something different they did on a regular basis from which other entrepreneurs can learn? And do you remember any feedback you gave them that significantly moved the delta for them?
BS: Actually, many companies don’t get most of this right. In fact, I would argue that many startups in India (even larger ones) do not have product-market fit, clearly established and differentiated value propositions and high-quality business models. Problems occur when the hard work of building a strong foundation and solving hard problems is cast aside in pursuit of premature growth. In other cases, companies may establish product-market fit and prove business models, but the market may be small, or there may not be strong tail-winds that enable rapid growth. That's why IPOs are so rare – because a number of factors relating to team, market, company, and timing have to work together.
In the case of IEX, the company was operating in a very large market and benefited immensely from structural changes in the power market (ie, the timing was good) and a business model with strong network effects (so the company’s early leadership translated into a defensible moat). But above all, what strikes me looking back is that the team stayed laser-focused on the opportunity and relentlessly plugged away on deepening the market and evangelizing the concept of a power exchange.
SS: Did IEX team think and plan towards an IPO very early on? Were they driven towards this outcome and worked towards it?
BS: Not at all – I would say that the company developed in two distinct phases. The first phase was focused on establishing viability. The second was on scaling off a strong and healthy foundation. Given the high operating leverage in the business model (meaning that costs are largely fixed), as the business grew, it became quite profitable and highly capital efficient. IPO discussions were tabled only once we had built a strong, market-leading company.
SS: What should entrepreneurs expect from an investor who is a board member?
BS: This is a tough one to answer because every entrepreneur is different and may want different things – it’s never one-size-fits-all, and it would be presumptuous of me to try and answer this. What I can say is that when I was an entrepreneur, I wanted an investor board member who understood me and my business but saw things from different angles, who questioned me in a manner that pushed my thinking, who helped pull me out of the weeds and stay focused on key priorities, and who sometimes was simply a sounding board. This is the type of board member I aspire to be for the entrepreneurs I work with. But I’d love you to do a survey and tell me the answer to this question!
SS: Why don't stories like this become viral and bigger and more cherished, unlike anything in consumer internet does? :-)
BS: I don’t know! I think B2B and enterprise companies/stories are always viewed as being less sexy than the consumer. Perhaps it’s because most people can’t relate to them personally as much as they can to consumer companies and/or because the profile of the companies or founders don’t make for exciting front-page news.
I also think there is a bit of fascination with big money and headline metrics rather than with more mundane subjects. In the case of IEX, this was building a company valued in the public markets at Rs 5,000 crore with only Rs 35 crore of external capital raised.
Here's an article Bejul wrote recently on IEX...
Indian Energy Exchange (IEX): Lightspeed’s journey from the first investor to Initial Public Offering
I first met Jayant Deo, then CEO of IEX, on January 12, 2010. What was meant to be an introductory meeting went on for several hours as I learnt about his personal story, his prior experience as a Maharashtra state electricity regulator, the origins of IEX, the structure of the Indian power industry and why a transparent, efficient market for power was a necessity for India.
The premise was quite straightforward. At any given point in time, a consumer of power in one part of India doesn’t have enough power, while a seller of power in another part of the country has too much. Because power is perishable, the cost of a mismatch in demand and supply is very high – to companies, industries, and the country.
IEX addressed this problem by launching and operating a spot power market to match demand and supply while ensuring payment integrity and fulfillment.
At the surface, this wasn’t a ‘typical’ Lightspeed opportunity; it was after all a regulated company run by a former bureaucrat, and there were no global analogs (successful examples of similar companies in other countries) to help guide our thinking. The company was small and unprofitable at the time, with a highly concentrated buyer and seller base, serving an industry that we knew relatively little about.
I walked away from that meeting with a sense that IEX had the potential to be a truly important company. If the team succeeded in creating an efficient, transparent market for power in India, this company could be transformational in enabling the efficient pricing and allocation of a critical input for Indian industry, and therefore India’s economic growth.
While there weren’t many global analogs, there was clearly an opportunity to solve a big, important problem unique to India. This first-principles approach has been a cornerstone of Lightspeed’s international investing and has guided many subsequent India investments such as OYO, Byjus, Sharechat, Udaan, Shuttl, and others.
As we spent more time with management and dug below the surface, it became clear to us that IEX was, in fact, a typical Lightspeed opportunity for the following reasons:
As is always the case with early-stage investing, there were numerous open questions, but we built deep conviction that, in a success case, this was a prize worth winning.
Lightspeed was fortunate to invest in the company’s first and only primary round of financing a few months later, investing Rs 35 Crore ($5.4 million) for 10 percent of the company. Fast forward to today, and it is amazing how much has changed, yet how fully the original thesis remains intact. During FY 2017 more than 1,100 entities traded power each day on the exchange vs. approximately 120 when we invested. FY 2017 profit before tax closed at Rs 173 Cr ($26.6 million), and the company starts trading on the public markets today.
As the company’s first institutional investor and a long-serving board member, I’ve been fortunate to work as part of a strong and aligned shareholder group to support MD & CEO S N Goel and his management team in building a market-leading enterprise. As with most early-stage investments, the journey is anything but a straight line; we’ve seen periods of flatlining revenue followed by strong growth, competitive threats successfully fended off, a smooth CEO transition, change in ownership from original promoters to a wide array of institutional investors and much more.
But throughout this time, the underlying thesis never changed – the size and importance of the opportunity, the strength of the value proposition to buyers and sellers, the company’s market leadership, the quality of the business model and a passionate and committed team that grinds it out, day by day.
While the public offering of IEX is an important milestone for the company, management team, and shareholders, there remains much work to be done to fully capitalize on the opportunity. IEX still only trades approximately 3.6% of the country’s power, suggesting significant headroom for long-term growth in its core business, with additional opportunities in renewable energy certificates, new products and perhaps derivative markets at some point in the future.
Lightspeed is delighted to remain an investor in IEX, and we look forward to continuing to support the team’s mission of bringing efficiency and transparency to the country’s power market and delivering affordable power to all.