There’s real value in digitising existing GDP: Matrix Partners India

The venture capital firm is keen to double down on the winners in the portfolio and defend its ownership in these startups.

Thursday May 25, 2023,

6 min Read

India has consistently disappointed both the optimists and the pessimists. There are people who get disappointed because they were too optimistic while the pessimists miss out on real value creation in the country. But as part of the venture capital ecosystem, Matrix Partners India follows a future backwards philosophy.

"We are always living in the future. Yes, the past has given us a lot of learnings. Sometimes we have overestimated the market, and invested too early or put in a lot of capital. But see what has happened since 2016. The pace of digitisation enabled by Jio and the likes has led to a massive transformation, which has made us very bullish about India," says Tarun Davda, Managing Director, Matrix Partners India in an interview with YourStory

This bullish outlook is not merely a sentiment, but an actionable insight for the VC firm. Matrix Partners India closed its fourth India fund, its largest-ever, at $550 million, exceeding the initially intended fund size of $450 million. This has happened despite talks of a funding winter and muted investor sentiment.

Tarun believes that India's big moment has just begun. He explains that the larger fund will enable Matrix Partners India to invest more capital in new portfolio companies that emerge as winners.

"The $550 million is an endorsement of Indian entrepreneurs. We will continue to defend our ownership of our portfolio's winning companies. But the total number of investments will remain more or less the same, between 45-50," he adds.

Matrix Partners has been a long-term backer of India's entrepreneurial ambitions. Its VCs had the foresight to invest in breakout brands such as Ola and Razorpay when the market believed otherwise.

What drives the confidence about India's growth potential is also the government's efforts to digitise the economy. From banking and financial services to FMCG, retail, gaming, and electric vehicles, no sector is untouched by technology. And that is where Matrix Partners has a laser focus.

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Betting on the India story

Tarun, Rajat, and the team at Matrix Partners are optimistic about three key themes. The first is early-stage investing or seed to Series B funding between $1 million-10 million. The second is to identify companies that benefit from the digitisation of the existing GDP. Finally, Matrix Partners wants to have a disproportionate focus on experienced founders.

"Fifteen years into our investing journey, we have enough founders who have been around, made mistakes, and learnt from them. Even we, as investors, have learnt from this journey. Hence, we want to back these entrepreneurs," says Tarun.

He recollects the experiences from the early days of the internet where it was young, daring founders who created value. Today, Rajat believes that 30-40% of value creation is done by founders who started up, sold their venture, and started up again.

These are the founders who proved to the world that India has the potential to create $5 billion-10 billion worth of real-valued publicly listed companies. If you ask Rajat, he will tell you that India is truly a shining light in an uncertain world. Inflation is under control, GDP growth is back on track, and consumption has revived.

"Any incremental GDP per capita will increase the level of consumption among Indians as more disposable income will be available to spend on goods and services beyond the basics. At Matrix, we will follow these trends and continue to invest in sectors that benefit from core consumption - such as consumer brands, consumer internet, B2B commerce, and fin-tech. Additionally we will continue to invest in globally relevant sectors such as SaaS, Al, semiconductors, etc" says Rajat.

He has a point. India has seen a surge in consumer spending, especially on discretionary items. SUV sales, for instance, saw double-digit growth in April 2023 and drove revenues for carmakers in the financial year FY23 as well.

There is also a China angle here. India could benefit with global manufacturing moving away from China to newer destinations owing to geopolitical issues. International brands are eyeing India as an alternative destination and that is bound to have a multiplier effect.

These signals boost Matrix Partners' India commitment. Tarun says that the VC made 15-20 investments in the last 12 months despite the scepticism in the market. As an investor, he is most optimistic about sectors such as Al, climate-tech, EV, and semiconductor. His thoughts match the Indian government's vision. The government has announced subsidies for manufacturing EVs and setting up semiconductor plants. Making in India for the world is a theme that Matrix Partners India is equally bullish about.

Illustrating the possibilities, Tarun offers a glimpse into a future. India's GDP is -$3.5 trillion, of which digital market capitalisation is 5-7%. This translates to $150-200 billion. If we fast forward to 2033, he estimates a -$10 trillion GDP, where the digital market cap will take a 20% share. That is almost $1.5 trillion to $2 trillion of incremental digital market capitalisation.

"While some of it will go to incumbents such as Jio, around 50-70% share will come to startups. That is the opportunity we are looking at," he adds.

As India sprints ahead to become the fastest growing economy in the world, the VC firm is flush with capital to support this endeavour.

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Patience and resilience to beat the blues

Being an active participant in the Indian startup space for over a decade, Matrix Partners India has seen cycles of ups and downs. The VC firm has disregarded naysayers and invested in startups regardless of opposing opinions.

"You make money when you are a contrarian and right. We were the first investors in Razorpay. We were told that the market is crowded, and it is a tough space, but look at the company now, it processes $100 billion plus payments annually. It was the same with Ola, where we were told that the app driver model will not work. Eventually, we were proved right," says Tarun

Ola is a company that Tarun and Matrix Partners are still very buoyant about. Tarun adds it is not just because of the growth figures, but also because of the limitless ambitions of Ola's co-founder, Bhavish Aggarwal.

"I like founders who are daring and ambitious and I like to back them because they are inspiring. Sometimes they get it wrong, but we can always work on it again," he explains.

As Indian startups evolve and thrive, the VC-founder equation also is changing. Tarun and Rajat admit that the current crop of founders are choosing VCs as much as VCs are choosing founders.

Today's founders have navigated extremely challenging funding cycles. Entrepreneurs who started up between 2017 and 2021 had adequate funding to choose from. The circumstances have changed since then. That's the reason Tarun and Rajat believe these founders need to be truly celebrated. They are a symbol of resilience.

Rajat believes founders must stay true to their entrepreneurial vision. "Be patient, value creation is coming," he adds.

A Digital India and a digitised India will drive value for these startups. The pathway towards a $1 trillion digital economy by 2025 runs through India's entrepreneurial minds. And Matrix Partners India is fully equipped to lead by example.

Key Takeaways

  1. India is a bright spot in an uncertain world because it has massive potential to grow and digitise.
  2. Founders need to be resourceful, have a nuanced point of view, and always think long term.
  3. Matrix is bullish on sectors such as consumer-tech, fin-tech, B2B commerce, SaaS, as well as upcoming areas such as semiconductors, healthcare, Al and climate-tech.