Product first, numbers later

Chitra Narayanan

The biggest gift we have is that we are an evergreen fund, says Pankaj Makkar, Managing Director, Bertelsmann India Investments, the investment arm of the 185-year-old German publishing and media giant Bertelsmann Group. “There is no artificial pressure on bad deals just because we need to deploy a certain amount of capital,” he says. Unlike most other VC funds that have a fixed fund size and a closing date on investments, Bertelsmann draws its capital from its parent when needed. And according to Makkar, it’s an open tap. So far BII, which set up shop in India in 2013, at first operating through funds such as Helion, Kaizen and Nirvana before making direct investments on its own, has made 17 investments, with three exits. The three it sold were India Property (bought by Quikr but then BII bought shares in Quikr so it was more an equity swap than a sale), Saavn (sold to Jio Music) and Roposo. BII was the first dedicated fund here focused on Series B, C and D, says Makkar. Excerpts from an interview:

Why did you choose to focus on the growth stage and not the early stage? Has your strategy stayed the same?

When we started, we realised most of the VC funds in the country — the Accels, Sequoia etc. who were here since the 2000s — were headed by tech-minded people, either entrepreneurs or investors coming from Silicon Valley, which meant that their DNA was very early stage. The mid Series — B, C, and D — space was relatively vacant. So we zeroed in on that as a very active strategy. Many said it was a bad idea. But thankfully we didn’t listen. Our strategy has remained the same. When we started, the horizontal game was already played. So we played the vertical game — our early investments were Saavn, Pepperfry, and indirectly through Helion we had exposure into Big Basket. We invested in categories like logistics (Shiprocket), edtech (iNurture), food-tech (Licious), funtech (Lendingkart)... In a year, we make 2-4 investments in Series B or C stage where the cheque size could be $10 million to $12 million. Plus we do five to seven follow on investments. We love doing that.

At the growth stage, given that the ticket size is larger, perhaps the risks are higher too...

The death valley curve of venture as it is called can be a tricky space. We look at categories and see if we can figure out the eventual winners — if we cannot, we will leave out that entire category. For instance, in the food aggregators business, till today I cannot figure whether Zomato or Swiggy will win or Uber Eats will eat them up. Even if we cannot predict the eventual winner, if we can figure out the winning business model, we will go for it.

So how did you figure out that in the online furniture space Pepperfry had a winning model?

We invested in Pepperfry for three or four reasons. Of course the team was fantastic. But Urban Ladder was also good. But Pepperfry is a marketplace business. Urban Ladder was a manufacturer seller — retailing its own designs. In an unstructured category such as furniture where everyone’s tastes differ, the variety needed to meet all consumer demands would be very high. So if you are in the business of making inventory, you would be unable to satisfy the depth and breadth of consumer demand.

When we were looking at the space, we were very clear what kind of business model would win. Pepperfry as a marketplace business, with tie ups with local vendors, was better suited, we thought. Our assumption was that the marketplace player would take 50 per cent of the market share of online sales, the balance 50 per cent would get split between the Ikeas and Urban Ladders of the world. That view still exists. Our method is to first look at the business model. We don’t get unduly excited over numbers. We are obsessed with the product, then the process and only then numbers.

Were there any bets that you didn’t take and have regretted?

Of course, there are a lot of such companies. I regret not investing directly into Big Basket. It fit our criteria, but there was so much noise then about Grofers and all.

How has the pandemic impacted your portfolio?

Pandemic brought forth tech adoption. We are running a year ahead of time in companies like Licious (an online meat and seafood delivery company). Of course, it always had exciting growth prospects, but the pandemic has brought it forward. Out of our entire portfolio, the one that was somewhat affected was Treebo (a budget hotel). But I feel we will see a massive revenge holiday spree by the middle of May. And travel and hospitality may surpass the entire slump period very fast once the vaccination happens.