Guest: Rishi Navani - Matrix Partner
Host: Kamla Bhatt - PodTech
Kamla Bhatt - PodTech
This is Kamla Bhatt for PodTech. Rishi Navani is the Founding Managing Director of Matrix Partners India, earlier this year Matrix Partner made its first round of investment in Seventymm, a Bangalore based online Movie Rental Company. Prior to Matrix Partners Rishi was the Managing Director at WestBridge Capital Partners, now known as Sequoia Capital India. Rishi has also been associated with various other Venture Capital Companies like Patricof & Co, Ventures Inc., IndOcean Fund, and he has worked at Chase Capital and A.T. Kearney. Welcome to the show Rishi.
Rishi Navani - Matrix Partner
Thank you very much Kamla, happy to be hear.
Kamla Bhatt - PodTech
Seven million that's the number that we see, that we've been seeing for the past few weeks, Matrix Partners invested 7 million in Seventymm. What is this magic number 7 million?
Rishi Navani - Matrix Partner
Kamla, in my view it's just plain coincidence, we had determined what the company needed to finance its growth plans, and we ended up at 7 million. I think it's purely coincidence that several people are ending up at exactly that number.
Kamla Bhatt - PodTech
That is no esoteric reason behind the 7 million.
Rishi Navani - Matrix Partner
No, I don't think so.
Kamla Bhatt - PodTech
I'm just checking.
Rishi Navani - Matrix Partner
In fact, it's quite surprising because I mean it's pretty easily with 7.5 or 6.5 or 8 or I'm quite surprised that the last four or five investments have all been exactly at 7 million.
Kamla Bhatt - PodTech
Okay, so we'll go back to the beginning. You have been since 1996, you have got about ten years of experience in the Indian investment space. What in your view have been some significant changes that you've seen in India, and what is your view of the current investment landscape in India? Does it feel like Silicon Valley in 97, 98 in India?
Rishi Navani - Matrix Partner
Sure Kamla, I think the fundamental change from the early days is just two things broadly, so number one starting a few years ago, the world woke up to India as a market. India was a very small market in 1996, so the first Venture Capital and Private Equity that came into India significantly was early in the late 90's and most of its followed a strategy where India was an outsourcing base for US and other markets. Starting in 2004, investors woke up to India as a market. I think in 1996, tenderly we were early in the lifecycle of the Indian market, so I think India emerging as a market of size is the single biggest change. The second big change is, now there's a history at least for the last five or six years of some firms having invested and the ecosystem is starting to develop. There is significant amount of excitement in terms of entrepreneurs wanting to start new ventures, to answer your question about whether this is - - we are approaching a bubble here like Silicon Valley at the end of the 90's.
I mean certainly there's a tremendous amount of excitement about India, it is also based on some very strong fundamental growth. So, 8% the economic growth is well talked about, but if you look at many of the companies that are getting funded, many of the sectors that people are excited about. You're seeing significantly higher growth than even the 8% type number and if you look at an environment where leading companies are growing 20%, 30%, 40% a year, I mean that's certainly an attractive environment to invest in, and therefore I'm not surprised that people are very excited about India. The other thing I'll point out make is, fundamentally people are also looking at India as a market because the big driver of the global economy, the US is slowing down and so people are trying to find places where growth is significantly faster.
Kamla Bhatt - PodTech
How did India emerge as a investment destination for VC's?
Rishi Navani - Matrix Partner
So, Kamla basically today Indian are depending on the which numbers you've looked at more sufficiently is roughly $750-$800 billion economy, if you went back ten years and you look at 6-7% growth, you know you are talking about an economy that was roughly half of the size or even less than that and you know so fundamentally in many sectors, they've just simply wasn't the size to create large companies, and the second part of that is at the -- in the early 90's a lot of the companies that they were there in India were basically driven by the government, and one of the things that the government did in the early 90's was open up many sectors, so whether it was telecom or financial services or other industries. Essentially private capital was invited, private investment was invited, private management and ownership was invited and suddenly you started seeing growth in the Indian economy. But that cycled to ten years to play out, in fact a little more than ten years to play out. And so, a suddenly you now had a significant economy, a very young economy a billion people; privatization had spread across the economy. So, India's time has come, it's been in the works for a long time but India has arrived as a mark.
Kamla Bhatt - PodTech
In your view, how long will this run last, that is how long will India remain as an attractive investment destination, and what are some of the variables that could take VC's by surprise?
Rishi Navani - Matrix Partner
I would say, it's very predict how long this run will last, I mean for the foreseeable future, which is looking across the next 10 or 20 years. If you just look at India's market size today, we are less than half the size of the state of California as an economy. California has 30 million people, and India has a billion people, fundamentally even 8% or 9% growth is not necessarily that larger number, when you taken to account size of the population. From my perspective even if you grow at a very fast rate for the next 15, 20, 30 years, we would certainly be a significant economy. But I don't see problem with the market getting too large because you've got a billion people to support in a very young population , all the dynamics suggest that this is going to last for a very long time. In terms of what could take VC's by surprise.
I think you have to be very careful with the markets you choose to invest in because while I say that in India today there are sizeable markets, there are some sizeable markets. In many markets, from a Venture Capital standpoint, the market size is not adequate and the growth rates are not adequate. So, you have to be very careful in picking those markets because today in an environment where you've got a significant increase in capital, valuations have risen. You could very quickly find yourselves in a very tight tough spot having invested money quickly at high valuations in the wrong markets, and not having much to show for it, and the other challenge is, it is extremely hard to build companies, and it takes time. And you could be wrong with your estimation on how long that is going to take.
Kamla Bhatt - PodTech
What are some of the areas or sectors that you think don't have large enough markets for VC's to invest in and what are some of the areas that have large enough markets and probably a market say in Middle East or Africa, thinking of the mobile value-added services company that are located in India, and looking to expand in Middle East and then Africa, what is commonly referred to as Mina.
Rishi Navani - Matrix Partner
Market, that are not large enough. I think fundamentally there's a lot of interest in technology in India, I don't think, there's a very large technology market in India and people are talking about global companies, I'm a big believer that you need to have a local market before you take a company globally. Israel is the only counter point to what I'm saying, and if you look at India as a technology market, there's roughly $10 billion of enterprise, IT spend in a year, and 90% of that is in standardized technology, which is Dell Computers, Cisco Routers, Microsoft Software etcetera, etcetera. And therefore the innovation budget, which startup convey for is really not that large, and therefore it's pretty hard to build a sizeable technology business in India today based on the Indian IT market.
So, I would say that's one place to be very careful, in terms of large markets there are many large markets within consumer services. Consumer services is the focus of Matrix Partners India, we've focus on only through growth stage companies that have focused on company that sell directly to the end consumers. Those tend to be Internet, mobile, financial services, media and entertainment and other sectors. So, I think the story in India is really more of a consumption lead economy. 64% of GDP in India is consumption, in China that is 42%, so very different economies. Mobile value-added services certainly the Mina countries are a market for invest companies, but I think before Mina countries being a market for invest company in India has to be a significant market for invest companies.
Kamla Bhatt - PodTech
Okay, so you are a big believer that India is where the market is for lot of the startups?
Rishi Navani - Matrix Partner
Well certainly, back to my belief that it's not that easy for startups to have foreign markets without having a local market, and yes that -- it certainly true that the IT services companies have succeeded, but you know it took them a 15 or 20 years to get there, and it was on the back of general electric and others who were in India at that time that this whole movements started. So, I think the presence of a domestic market it is critical. The way I look at it is a building businesses is just much less risky if the market is local.
Kamla Bhatt - PodTech
How do you evaluate companies, what matters most people or plans, and do companies have to have a strong track record and have big name people before you decide to invest?
Rishi Navani - Matrix Partner
In terms of how we evaluate companies, the simple thought process and it's as much an art as a science, but I would say it's more of an art than a science. It's simply a great management team focused on a large idea, and literally that's why investment thesis. There are many ideas, in India today there are lot of wide spaces, so it's dangerous to just focus on the idea, execution has extremely difficult in India. So, I would argue that both are extremely important in terms of, if you look at the companies we are looking at, we are in active discussions with four companies. Two are second-time entrepreneurs and two are first-time, it doesn't have to be people with a long track record, in some cases it is, and in some case it's not, it really depends on the specific situation.
Kamla Bhatt - PodTech
I asked that question wondering if Matrix Partners would be open to looking at a plan that originates from either Nagpur or Aurangabad from an IT Techy who is sitting there, and has probably a great idea and the great vision, but may not have a great track record. Would you then evaluate such a business plan?
Rishi Navani - Matrix Partner
Absolutely, I mean we've not focus on IT business plans per se we've focus on consumer services but apart from that absolutely would be interested in evaluating such a business.
Kamla Bhatt - PodTech
Now let's go to Seventymm, that's the first company that Matrix Partners invested. Before we go there, how big is the corpus of Matrix Partners India?
Rishi Navani - Matrix Partner
150 million.
Kamla Bhatt - PodTech
And it's just a three-month-old investment firm.
Rishi Navani - Matrix Partner
Correct.
Kamla Bhatt - PodTech
How did you pick Seventymm, what were your reasons for investing in Seventymm? Could you walk us through your thought process?
Rishi Navani - Matrix Partner
There are fundamentally three reasons for investing in Seventymm, number one is the market opportunity. What is the market opportunity at a high level 50 million DVD players will be the installed base in India in a short period of time as in three to four years, and there's very low risk to that you already have 50 million plus VCD players, so this is just technological change. If you look at DVD player, accentuate a DVD player is only as valuable as the rental service attached to it, it is not that useful otherwise. Now you'll have some percentage of people that will say that the Seventymm price point is too, there's some percentage of people that will say that we don't really have a rental service, we have a DVD player, we've never used it, and then there's some percentage of people that will say we use it to watch marriage videos, or few movies that we've bought, and lastly a group that will say that you know we watch pirated films or look at other rental services, that are not like Seventymm.
If you assume that you have that comprises 40% of the market and let's just make a guess here, but a reasonably educated guess, so you've got 30 million real potential subscribers for this service, and let's based on current price point assume that, and you could charge the average customer about $6 a month. At that point you have a $180 million a month market, which if you look at on an annual basis, you are looking at something that is not of $2 billion a year, which is a significant market. So, we certainly believe there's a very significant market opportunity. The second point after the market opportunity is the value proposition to the customer that's Seventymm has, it hinges on three things, number one choice, your average neighborhood DVD rental store will have anywhere from 300-500 titles. Seventymm has 10,000 titles, there's substantially different choice. Second convenience the experience of the consumer in India is you call your neighborhood store on a Friday or Saturday night, you sit on the phone with the guy for 20 or 30 minutes, and then end up with a DVD you don't like. And, if you don't end up watching it that night, then you are charged late fees. So, the whole experience is not tailored to what do I want to watch, and when do I want to watch.
It's more of a, you know I'm not probably not going to get the movie of my choice I'm going to end up paying late fees. So, on a convenient stand point Seventymm provides everything that the neighborhood store provides, and then some. Lastly is cost, at the very high end a DVD rental service in Bombay, in South Bombay would cost you 8,000 rupees, which is roughly $180 upfront for 80 DVDs and that would be $2 in a quarter per DVD, which is significant, and it's a upfront. Seventymm, if you look at the price point it's a dollar a DVD, and it's not upfront. So, from a cost standpoint it's more cost effective to go to Seventymm then some of the local options available. So, that was the second criteria. The third is execution, so okay you have a large market opportunity, you have significant customer value proposition who's going to execute this, and we believe Raghav Kher is a fantastic leader and has built a phenomenal management team at Seventymm, we've had the luxury of meetings, several other companies in the space and we've believe that Seventymm has an excellent management being relative to its peer group. And it's showing in the results, that's fine we've continue to believe that the gap will widen, going ahead.
Kamla Bhatt - PodTech
Now the DVD rental market in India is pretty fragmented, and you've touched upon it, you've mentioned the local DVD shop. How did you (Inaudible) that in when you evaluated the company, because there're so many neighborhood DVD rentals that we all get associated with? You have your favorite DVD rental shop; I have my favorite DVD rental shop. How does MTMM bridge that gap?
Rishi Navani - Matrix Partner
Yeah, so Seventymm becomes, we hope everyone's favorite DVD rent but it'll be basically present in the six major cities in the next six months. And, regardless of where you are in those major cities, you will have access to delivery from Seventymm. So, Seventymm delivery person will come to your door and give you two DVDs and when you finish those two they'll come and give you another two and process goes on.
Kamala Bhatt - PodTech
When you invest in companies, how do you expect to succeed? For instance let's take the case of Seventymm. You've invested in Seventymm, what is the plan that you all have on how Seventymm will succeed and also if you could talk a little bit about the exit strategy?
Rishi Navani - Matrix Partners
So, the goal Kamala is to build a $100 million business in five years with a million plus customers. That's simply the goal at Seventymm, now if you make some assumptions on margins such as 15% margins, you'll see that, that based on reasonable norm should be a pretty sizable business. In terms of exit I think there're three different options with Seventymm, the easy one is obviously IPO in India or the NASDAQ for that matter. The Second is for NetFlicks or other US company wants to enter the Indian market, Seventymm is a very natural acquisition candidate. And the third is; some of the local players who're interested in look at Seventymm Strategically and want to get into the DVD rental business. Reliance has certain ambitions on this space, Reliance entertainments so they could be Indian acquirers for Seventymm. So, those are the possible exit options.
Kamala Bhatt - PodTech
Okay, what is been a success and what is been a failure in your ten year track record when you invested in companies?
Rishi Navani - Matrix Partners
The biggest success has been a company called Jamdat Mobile; I would say in the case of Jamdat Mobile, it was an investment in consumer mobile company in early 2001 when I was a APAC partner and so the difficult time to invest in consumer mobile companies, fortunately we did make the investment behind a very strong entrepreneur called Michalski for the first two years the key risk in the investment showed up, which was market timing. But in year three the market started taking off what substantial attraction the rest is history basically 2004 the company went public, 2005 it got acquired by electronic arts, we realized the very significant return on our $10 million investment in the company so that was certainly a big success. Jamdat is the leader in the mobile games space globally actually.
Biggest failure turned into success, we had invested in a company called First Ring in the call centre space five years ago and I had to make a lot of changes to the company, lost our largest customer within three months of making the investment it was 75% of the business. I had to rebuild some of the management team and raise money for the company under pretty difficult conditions. Finally after building a team getting some new customers, ramping some existing customers we've merged the company with ICICI OneSource so and then made a follow-on investment in ICICI OneSource and so we had a situation where there were many days we were thinking that we would have to be in the unfortunate position of shutting down the company and here we have a situation where ICICI OneSource is now a market leader in the call centre space and we have most likely going to realized a significant return on our investment.
Kamala Bhatt - PodTech
Could I ask you what were the problems that you encountered after you had invested in this company First Ring?
Rishi Navani - Matrix Partners
Yeah, so the biggest problem was within three months of our investment single largest customer of the company pulled a contract and this was related to their own issues but it was 75% of our business and from being cash positive we went to losing significant money per month. So, that was clearly the biggest problem.
Kamala Bhatt - PodTech
You mentioned that, but I was trying to drill down a bit deeper and see why did the customer leave was it something on their end or was it because the company did not cater to the customers needs and was not looking after what the customer needed?
Rishi Navani - Matrix Partners
Actually it was not that, so unfortunately it was not a performance driven decisions it wasn't an issue with the company, it was an issue with the customer.
Kamala Bhatt - PodTech
Now my final question is after you invest in a company how engaged do you stay in companies and what is your involvement for instance, with Seventymm you're in the board. Can you talk a bit about that?
Rishi Navani - Matrix Partners
Yeah sure, our key value proposition as a investment firm is, we get very actively involved with our companies. All of the venture capitalist say that, we actually do that. So, what is the involvement it's on various fronts. So, currently I'm working with Seventymm to recruit senior member of their management team to build out their team further. I'm helping them with some distribution deals and helping them with overall strategy. Now management is ultimately responsible for driving the company what we take an active role in recruiting strategy customers/partner introductions in a case of Seventymm won't be customer because it's individual customers. So, those are the - equity financings overall bring a vantage point from looking at the industry as a whole. So, we get - very involved with the company and certainly our CEOs would be the best judge of that.
Kamala Bhatt - PodTech
We wish you all the success with Seventymm and can we expect any kind of announcement before the end of the year about an investment in a new investment?
Rishi Navani - Matrix Partners
Certainly you will.
Kamala Bhatt - PodTech
Okay, thank you so much for your time Rishi.
Rishi Navani - Matrix Partners
Kamla really appreciate you're having me, very much enjoyed it thank you very much, yeah.
Kamala Bhatt - PodTech
You were listening to Rishi Navani Founding Managing Director of Matrix Partners India and a board member of Seventymm, India's first online DVD rental store. This is Kamala Bhatt for PodTech and as always thank you for tuning in.