‘The e-commerce excitement is for real now’

Avnish Bajaj is convinced that the excitement surrounding e-commerce in the country is real and that it is not a bubble waiting to burst, as on earlier occasions.

“This time it is real. The fundamentals have changed. Smartphones have gone up and it is largely driven by mobile Internet. Also, very importantly, the nature of entrepreneurs has changed significantly,” he says. There is a unique confluence of talented, hungry, appropriately motivated entrepreneurs, a deep and inflecting market, and the funding ecosystem.

According to him, 1999-2000, then 2007 and again 2010 were all e-commerce bubbles that burst. So, there is a tendency to view the present euphoria in the sector as also yet another bubble. He dismisses such talk and says “they are all wrong.” The whole ecosystem has started thriving and “I am optimistic and bullish about the next five to seven years. I think everything is in place.”

As Managing Director of Matrix Partners India, a leading venture capital firm that invests in early- and early-growth stage ventures, 43-year-old Avnish has his finger on the pulse of the sector. He was himself an entrepreneur, having started Baazee.com, which he sold to eBay for $55 million in 2004.

A Computer Science and Engineering graduate from IIT-Kanpur, Avnish completed a Master’s in Computer Science from the University of Wisconsin, Madison, in the US and then worked in Apple. He then went on to do an MBA from Harvard and worked in the banking industry. Around the turn of the century, he returned to India and started e-commerce site Baazee.com, which had raised $21 million by early 2000 itself. That was when the e-commerce bubble also burst. Avnish recalls that the journey was pretty rough, “but we stuck to what we were doing.”

After selling his venture to eBay, Avnish says he had experience of dealing with venture capital firms and “I felt I liked both sides of it. So, I started angel investing.” He invested in about 15 companies for one year and says what he liked most about that phase was the experience of working with different types of entrepreneurs in different industries. That is when he also felt the need to invest on a larger scale and together with his partner Rishi Navani, and Matrix Partners of the US, set up Matrix Partners India, in 2006.

He says that when he started Baazee, he was 28. At that time, the other entrepreneurs were all in their 40s. “They were all chasing the valuation game and they were all old-world business executives.” In the next stage, in 2007, the entrepreneurs’ age profile had come down to 30-something. They were educated in IITs and IIMs, done a little bit of consulting and had some business background.

He says these entrepreneurs looked at business plans and analysed the market and started off their ventures. They too weren’t very successful. In 2010, which was the next bubble, the quality of entrepreneurs went up quite significantly; they were younger and hungrier. But, the problem at this stage was that investors got carried away and every e-commerce venture was funded. “That bubble was more an investors’ creation than an entrepreneurs’ creation,” he adds.

In the last two years, entrepreneurs are hungry, in the mid-20s – in the 23-27 age group – some having even dropped out of college. “They are fearless. Why you need younger entrepreneurs in this innovation thing is you have to be fearless. They have nothing to prove and everything to prove. That is encouraging,” emphasises Avnish.

What is the type of entrepreneur he would back? “We love what we call H&H – Hunger and Hustle,” says Avnish. Is the guy hungry to succeed? Do they have the hunger and the hustle to go with that hunger? “I love to back what I call experiential entrepreneurs.” Those who experience a pain point and come out with solutions to solve them, he says. Then the solution will be much more gut instinct. “We look for the right combination of IQ and instinct.”

Matrix, with about ₹3,000 crore under management, invests in early- and early-growth stage ventures. The first fund, of ₹1,500 crore has been fully invested, and Matrix is now investing out of the second fund. It invests in only India-based businesses. This means the first and primary market for the venture has to be India. Avnish says Matrix prefers to invest in ventures and entrepreneurs that it seeks out than react to what others have done.

“We want to play in certain spaces. We seek out the best entrepreneurs in those spaces proactively and then try to partner with them. Typically, we are trying to be ahead of the curve.” Matrix tends to do fewer investments, but works closely with the entrepreneurs, preferring to act as their “arms and legs” rather than run the business for them.

Matrix focuses on companies in the consumer technology, healthcare and consumer services sectors. There will be a few seed investments, up to $5 million, and early-growth stages, where the range would be ₹20-50 crore ($3-4 million to $10 million). Its stake in these companies could range from 15 per cent to 45 per cent, but the median would be around 30 per cent.

A trend that Avnish anticipates is more foreign companies, especially from Japan and China, acquiring ventures here. There have not been too many of this type; eBay buying Baazee, Naspers acquiring redBus and Pearson buying TutorVista are just a few notable ones. While American and European companies have been active in buying enterprises in India, those from Japan and China will start doing so for entirely different reasons, he says.

For the Japanese companies, with a saturated domestic market and extremely low cost of capital, India will be a growth market to invest in. Chinese companies will want to buy so that they can gain size, dominance and grab market share.

This will have an impact on the start-ups and the investors in these ventures. For, there have not been too many large exits in India. The size of the exits needs to increase if the venture capital business model has to become more viable.

“Once good profitable, large exits start happening, the venture capital business model becomes more viable, our investors start looking at us more positively, more funding flows into the VC universe, and more funding flows downwards and therefore angel investors start getting exits,” explains Avnish.

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