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For India’s heterogeneous market, you need patient capital: InnoVen Capital

InnoVen Capital's shareholders UOB and Temasek recently committed additional USD 200 million to support its growth

Jul 1, 2019 by Avanish Tiwary
For India’s heterogeneous market, you need patient capital: InnoVen Capital

In 2009, Silicon Valley Bank opened its office in Mumbai to provide venture debt to Indian companies. At that time, not only was the startup eco-system nascent, very few had heard of venture debt.

Finding its launch in India ahead of the time, SVB sold its Indian portfolio to Singapore-based Temasek in 2015 and was renamed InnoVen Capital.

“I understand that SVB wanted to work on a bank model, and getting a banking license in India was very difficult,” said Ashish Sharma, CEO, InnoVen Capital.

Since 2015, Sharma said, the eco-system has grown rapidly and so has InnoVen. InnoVen has led the way in educating the industry about venture debt. It has provided over half a billion dollars of venture debt, with a majority of that deployed in the last 3 years.

Another investor from Blume Ventures also said that one of the biggest reasons for the rise of venture debt is the sheer effort put in by fund houses such as InnoVen, Alteria and Trifecta.

Apart from being one of the leaders in India, InnoVen is uniquely positioned as a Pan Asian venture debt platform, with offices in China and Singapore as well.

The Passage spoke to Sharma, about technology startups in these three markets and how they affect each other.

Edited excerpts:

The Passage: Since you're the only fund from India to have presence in China, what could other funds learn from you?

Ashish Sharma: We are a regional player and not an Indian fund. It’s just that India was the first market for InnoVen. Subsequently we entered South East Asia and then we entered China roughly 18 months back.

While we have strong collaboration among the three offices, each market has local leadership and teams that understand the nuances of the market. A lot of the learning in the China market came from India. Some of those learnings have been adopted by other regions.

Today, we are the largest player in India and Southeast Asia, and one of the leading players in China, in a relatively short period of time.

The Passage: Do you also see any other Indian venture debt firms launching in China?

Ashish Sharma: I don’t see other Indian firms launching in China; they are essentially local Rupees funds focused on the Indian market. We had the benefit of having strong shareholders, who not only have meaningful presence in China but also understand the market.

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The Passage: What kind of regulatory licenses do you have to operate from India and China?

Ashish Sharma: We have the appropriate licenses in all the geographies we operate. In India, we operate through what is called an NBFC, a non-banking finance company.

Our Chinese business operate directly through a leasing company. They also participate through United Overseas Bank (UOB), which is a shareholder.

The Passage: So most of the funding comes from banks?

Ashish Sharma: At the top level, our shareholders, Temasek and UOB contribute equity capital. In India we also have access to bank borrowing, which provides us additional resources for growth.

The Passage: How are India and China technology ecosystems helping each other?

Ashish Sharma: At a high level, one could categorise the India/China connects in three buckets: Chinese investors looking to invest in India, Indian founders looking at Chinese business models for learnings and Chinese companies entering the Indian market.

Three-four years ago, most Indian founders used to look up-to Silicon Valley for inspiration. But now many Indian founders also learning from successful Chinese business models.

The same is true for capital. Till a few years back, capital was concentrated with Silicon Valley VC’s and a handful of India focused funds that raised dollar capital from institutional LP’s. Today startups have access to a much deeper pool of capital—global VC’s, local funds, Chinese VC’s, Japanese VC’s, family offices, strategic investments, hedge funds, private equity etc.

While strategic players like Alibaba and Tencent started investing in India four to five years back, these were largely late stage investments in category leaders. We are now seeing Chinese VCs also becoming active and some have already made a few investments.

I think a lot of Chinese VCs see parallels between China and India. Some feel that the China market is getting saturated and competition for high quality deals is intense. In India they may be able to find higher growth opportunities, leveraging their learnings from China.

Chinese investors have also seen some of their portfolio companies enter India, which has also helped them get a better understanding of the market.

At InnoVen we also leverage our presence in India and China to make connects between participants in both markets.

The Passage: Do you have any suggestion for Chinese VCs if they want to make some success in India?

Ashish Sharma: While there are some similarities, I would argue that there are more differences in the two markets. What worked in China may not work in India.

Yes, both countries have large populations and rising middle class but the size and maturity of markets are at very different levels. I often hear that India is where China was eight to ten years ago. In my mind the gap is more like 15 years.

The per capita income in India is a quarter of China, which constrains the size of the market. India has two dozen unicorns, while China has been creating unicorns at a pace of two a week.

While Flipkart was a great exit story for investors, India historically has been a challenging market for exits. China on the other hand has seen record exits and numerous companies have been able to access public markets, including NASDAQ and HongKong.

It’s also important to note that India is a more heterogeneous market than China, with many languages and more pronounced regional nuances.

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While it’s not difficult to monetise the first 100-150 million consumers in India, it will take time to achieve meaningful monetisation at the next level. It will happen as the per capita income rises but that takes time.

Another important difference is that global players like Google, Amazon, Facebook and others have access to the Indian market, which results in very different market dynamics.

Having said that, what makes the Indian market exciting is the massive growth potential. With a “digitally native” young population, rising income levels, increasing smartphone penetration and low cost data (largely due to Reliance Jio), we have all the right ingredients for growth.

Some business models in China can be tailored to Indian market but most are uniquely Chinese models and not easily copied. Investors who appreciate the differences in the two markets, while still learning from the China experience will do better. When it comes to early stage investors, some local presence will be necessary to gain better insights and improve quality of deal flow. It may not matter as much for growth stage investments, when an investor can evaluate most opportunities.

Investors will also need to be more patient and cannot expect the same pace of exits/returns as they have seen in China (at least in the medium term).

However I do firmly believe that the next decade will see a lot of interesting opportunities in the Indian market and some companies will generate disproportionate value, as they did in China.

The Passage: What is your fund size for China and India?

Ashish Sharma: We don't have a fixed fund size and get capital from our shareholders depending on the growth requirements. Recently our shareholders committed additional USD 200 million to support the growth of the business.

The Passage: This USD 200 million is for the India market or overall?

Ashish Sharma: It’s available to all markets and will get allocated based the growth trajectory in each market.

The Passage: You have around 26-27 investments in China and over 100 in India. Which market will be a priority as of now?

Ashish Sharma: All markets are growing nicely and we’ll continue to focus on strengthening our position in each market. However the size of the China market is huge and we also started later, so it's likely that China will grow faster.

The Passage: You’re well connected with India founders as well as have good exposure to Chinese founders. What differences and similarities between them?

Ashish Sharma: While I am no expert on China, I see more similarities than differences.

Both Indian and Chinese founders have a lot of hunger and willingness to do what it takes to succeed. They have high aspiration levels and don’t shy from dreaming big. Most founders come from modest backgrounds and worked hard to achieve good education. While growing up, they were told that success meant finding a steady job but all that changed with the emergence of the “New Economy” and access to venture capital for innovative ideas.

With respect to differences, I think Indian founders have a bit more global mindset. On the other hand I feel that Chinese founders have an edge when it comes to “speed to market” and driving scale. Indian founders’ global mindset is more pronounced in sectors such as B2B, enterprise, robotics and SaaS, where the addressable market is not large in India. So once the business achieves product market fit, it’s not uncommon for one of the Indian co-founders to move to the US or Southeast Asia. It’s also driven by the fact that Indian founders have to face global competitors and therefore they keep a close eye on them.

I think that the Chinese founders tend to be focused on local market because the domestic market is so large. With the exception of a few late stage companies like ByteDance, most founders focus on local market.

Avanish Tiwary

Avanish Tiwary is a Bangalore-based tech journalist. He focuses on emerging Indian startups and unicorns. He can be reached at avanish.tiwary@thepassage.cc.

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