The BL Interview. ‘VCs are pushing for self-correction from market to unit economics’

Last year around same time, Helion Ventures was going through a rough patch after few of its partners quit the venture capital firm over differences and started a new India-focussed fund recently. Now the remaining partners at the VC, which has some 60-odd companies in its portfolio, have also launched a fresh $100-million early-stage fund under a different name called Unitary Helion.

Rahul Chandra, MD of venture capital firm Helion Ventures, speaks to BuisnessLine on the need and focus of this new fund along with the challenges faced by the VCs lately. He feels that VCs are pushing for a correction, in the start-up ecosystem, from market to unit economics. Edited excerpts:

Could you please elaborate a little about Unitary Helion? What is the focus of the new fund?

Unitary is an early-stage fund that will invest in fintech, digital marketplaces and value chain innovation in core sectors such as financial services, agri, logistics and healthcare. It will create a portfolio of 18-20 companies under a common thesis – technology-based innovation that impacts hundreds of millions of lives. We are in the process of developing a proprietary data science-based investment methodology. The fund’s differentiation lies in the application of data science and broader growth methodologies to support portfolio companies, particularly with respect to quantitatively understanding product market fit, user growth and other start-up health metrics.

What do you mean by data science-based investment methodology?

Data science is being successfully used for diverse applications like for detecting host preferences by AirBnB or for growing user engagement at Facebook. A venture fund can also use data science and it has been done before successfully by a firm called SocialCapital. It is a matter of incorporating as an integral part of the investment decision process.

Data science-based investment methodology will then study customer engagement patterns to assess traction. This would add the third missing link to our investment decision, which is currently based primarily on market size and team quality. This link is the stage of product traction which is often hard to decipher. Understanding this traction is important to plan the right size of financing and the focus areas post financing. Otherwise customer acquisition costs will remain high and customers will leak at an alarming rate.

With the new fund, what happens to Helion?

Unitary Helion has been launched to address a very attractive opportunity in addressing the growth opportunity that is impending in the new to credit, new to banking households and small businesses in India. The demand for formal transaction and credit runs so deep that it would take a decade to fill the gaps and many large companies would be born in the process.

Unitary Helion with its focussed approach to company building and understanding of marketplace business, lending and payment space will be best suited to help start-ups build large businesses. Helion would continue to deliver value to the investors in the three funds that were raised. As people having long-term association with Helion, we remain committed to drive the optimum value for these investments by providing support and guidance through our board roles and back-office support. There is no immediate plan for Helion except managing the portfolio to the best of our capabilities.

What is the investment thesis for this fund and how is it different from Helion’s?

The thesis of the fund is to invest in networks, payment and lending businesses. The fund will invest in opportunities that work on innovation and India's move towards a cashless economy. There are hundreds of millions of Indians who are still reliant on informal transaction and credit networks. This prevents them from accessing the resources and benefits of the formal economy.

There is a tremendous opportunity to create new formal marketplaces by creating incentives like credit, business growth and digital payments. The payment flow that occurs on all these networks at scale could exceed $25-50 billion a year. Lending can be in the form of supply credit, business loans and personal loans around the intelligence of transaction data and secured through payment flow.

Investing in start-ups is a gut feeling, so how do you ensure that your investments are right and secure?

We balance the evidence provided by data science with our years of evaluating businesses at all stages. We can correlate a host of business characteristics to the milestone that the start-up is approaching. Gut is absolutely necessary to build a future view of developing markets and products but the stage of start-ups we have decided to enter at will mitigate risk like misunderstanding team strengths and latent demand for product.

What is the major challenge for a VC in today’s start-up environment where the focus is not on unit economics but market?

VCs are wholeheartedly pushing for this self-correction from market to unit economics. Having said that growth is an essential requirement as well for venture funded companies. Growth at what cost is the key question. Growth can come in several stages and small product victories have to be built upon. India’s product skills are now mature enough to deliver user growth on value without corruptions like incentives. VCs should make their position clear by focussing on the right metrics at the right stage and understand the product function well to focus on the small victories.

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