[Matrix Moments] Matrix India management on what 2020 looks like for the VC fund

In the latest episode of #MatrixMoments series, the leadership team of Matrix India speak about the sectors and deal sizes the fund is keen on, and what its outlook is for 2020.

Matrix India Partners did a record of over 20 deals in 2019. The same year, the fund also saw the emergence of the famous founder archetype. 

Rajinder Balaraman, Director, Matrix India, says: “People who have been there are building successful companies and are starting up for a second or a third time. We have also seen companies scaling up to become unicorns within two years; and in some cases, within a year. We have seen a lot of activity from large global and domestic investors.” 

But what does 2020 look like for Matrix Moments? What are the sectors and deal sizes the fund is keen on and what is its outlook? Let’s take a look.

Vikram, Avnish and Tarun, Managing Directors, Matrix India Partners

Defining the pace of investments

Avnish Bajaj, Tarun Davda, and Vikram Vaidyanathan - the three managing directors of Matrix Partners, believe that 2019 was an aggressive year for Matrix. 

Vikram says: “We don’t define the pace, but the founders and markets do. As company creation is getting faster, it is up to us to actually keep pace with it, and the founders will keep discovering new markets. Honestly, in 2019, we just kept pace with that. We are also looking at much wider set of areas - we started looking at edtech, and were also looking at agritech and logistics tech space. We could have done more deals if we actually found investments in those areas. It’s just that we have actually kept pace with the market.”

He explains that in the last three months 0f 2019, the company creation hasn’t been fast. So, if that slows, it may end up being a slow year in 2020. Vikram adds that apart from keeping pace with the market, as technology starts penetrating more and more sectors, you start finding more tech-enabled opportunities in every sector.

A longer deployment cycle

Adding to this, Tarun explains that if one looks at it over a $300 million fund, the deployment works around three to four-year period. In that context, he adds they would like to end up somewhere between 50 to 75 investments, with medium cheque sizes of $3 million to $5 million between Seed and Series A rounds. 

“Now, as we are going early, you will start seeing us make additional investments where we call it be loose at entry. But we are trying to make sure that we are taking enough risk while at the same time being capital efficient in terms of where we are allocating dollars in the companies at work,” says Tarun.

Secondly, today there are opportunities that didn’t exist two or three years ago. For example, the idea of a large company coming out of gaming wasn’t thought of three years ago. 

“But now, after seeing with what has happened with Jio and data consumption, it feels like one can build a large company in gaming. Another example is agritech. It was hard to imagine large number of people in the agritech economy actually using mobile two years ago. We are starting to see a lot of that beginning to happen. Social commerce and WhatsApp penetration amongst both consumers and businesses both on the B2B and the B2C side has enabled business models which till now didn’t seem real or at least didn’t seem well penetrated enough. So I think the idea is to go early after these emerging themes. Just in terms of that, I think the deal pace that we have done this year and hopefully what we do next year seems to be in line with the opportunity,” says Tarun. 

The inherent error rate

In a five-year cycle, the number of large companies being set up is anywhere between 40 to 50, with an average of four to five per year. Explaining how the probability of that increases, Avnish says, 

“We aren’t sure, but when we did an analysis, we managed to catch a good company after every five to six investments. By that logic, we assume that the market has deepened, and you should be making more investments. There is inherent error rate in this business and the more you try to become more regimented, I actually believe the error rate goes up. Therefore, part of it is we just say we don’t know and we have to be more loose at entry, assuming the call that the market is deepening is correct.”

But how does one take a call on new ideas and new GDP and tech kind of capturing incremental GDP versus tech going after existing GDP and making existing models more efficient?

Avnish explains that you begin looking at GDP per capita. He says, currently we are in the middle-income country zone, which is about $2000 to $3000 per capita. When this hits to $6,000 to $7,000, then that is where the consumption takes off. 

“We took a call that said at this stage the right strategy for Fund III is to disrupt existing GDP digitally as opposed to incremental digital GDP. The former is more of a transaction business. Go after a spend that already exists. For example, Ola is not giving you a new spend, you were already travelling. It’s substituted as spend, so it has captured existing GDP digitally. A lot of the lending businesses are capturing existing borrowing digitally. However, if you look at DailyHunt in our portfolio, if you look at Dream11, which is outside our portfolio, they are capturing incremental digital GDP. This is the new spend that is coming on to these platforms,” he added.

Adding newer sectors 

This also means changing the thesis and looking at sectors that they previously weren’t looking at like gaming companies. Vikram adds that the two areas the fund is looking at now is entertainment and gaming. 

“You are seeing time spent coming on whether it’s for gaming or entertainment; and new ways of monetising, consumers paying for that entertainment or advertisers actually paying wherever the large platform exists, so that one clear trend that you are seeing,” says Vikram. 

Another segment the team is looking closely at is SMEs adopting tech. Vikram adds, 2019 was probably the emergence of the Indian SME, which has started using WhatsApp for everything. 

“Whether it is customer service or payments or marketing, they just use WhatsApp for everything, and you can find many future companies in the use case that SME is doing. Now there’s always a question whether that SME is willing to pay because then that would be incremental GDP that’s getting created because it’s software that they are buying, which they did o’t buy before or there are other monetisation models. But that would be one trend to watch out for in 2020,” says Vikram. 

Apart from this, data consumption patterns too have gone up. The trio (Avnish, Tarun, and Vikram) believe that last year was the year of OTT, where people were not only consuming but also paying. 

Tarun says that the first nine months of 2019 was a lot more board based. Pretty much anything that showed very early signs or green shoots of something working were getting funded. 

“We are already seeing some version of correction that has happened. Companies that have raised and are well-capitalised would be sort of wise to use that capital well because our view is things have slowed down already. It’s not going to be as easy as it was in the first nine months of 2019. That said, the reality is good companies get funded in any environment. Sometimes the best companies are created in those environments. And so, for an early-stage investor like us, 2020 seems like a more normal year hopefully. We will see how it plays out. But hopefully it should give us more time to spend with these companies, more time to see their trajectory, and more time to diligence so and so forth,” he says. 

(Edited by Megha Reddy)