Value creation in India - business models in the new economy

Last week, had an amazing opportunity to attend an insightful talk organised by Mumbai Alumni Association of Carnegie Mellon University.

In this interactive interview, Vikas Choudhary (President Reliance Jio and Partner at Pivot Ventures - investors in 2 Unicorns (InMobi, Myntra) and many other high growth startups) shared useful insights in conversation with Aashay Doshi and other Carnegie Mellon Alumni and participants.

Here is the Youtube link of this insightful conversation.

And the key takeaways are as follows as shared by Aashay and team.

Overall Ecosystem Highlights:

• Zero to hero: India has always had the tendency to make leaps of progress: from 40 million landlines to 1 billion smartphones, from 20 million credit card holders to 200 million people exchanging micro payments, from no identification to 1 billion people on Aadhar who now can open a bank account with in 5 minutes.
• Democratization of access: Data and broadband access is now an affordable bare necessity which was previously a scarce resource. People are spending 8-9 hours digitally everyday.
• 1991 esque revolution: There has been a tectonic shift in the opportunity curve with digitization which is a watershed moment.

Venture Capital / Startup Highlights:

• Investment Numbers: $10 Billion got invested in Indian startups in 2020 with 50+ unicorns. 7000 new startups got added in 2020 and total there are 100 thousand + startups (9% are funded so the opportunity is huge) in India now.
• Foreign Funding: In 2006 average angel round was Rs. 1 crore INR ( ~$140K) and today is $1M (7 crore INR). More than 80% is foreign capital because the world printed $5 Trillion without an asset base. Interest rates are low and returns are outsized in India
• Regulations are needed to help Indian investors: Long Term Capital Gains tax needs to be reviewed, as does GST, taxes on carry. Regulations are much harsher for private businesses vs public ones. Indian investors are still very debt focused, but with better information and regulation, they will be inspired to move onto equity as well.
• Data & IP Protection: It is important our government fosters ease of doing business. Data sovereignty is extremely important because these are intangible country borders. One idea is to create an ‘SEZ’ equivalent for ‘5 click investment and business setup’. Estonia’s government is 99% online.
• Invoking Indian Capital: The government could potentially look at National Pension Schemes, etc to invest capital in Indian startups (similar to Sovereign Wealth Funds).

Learnings from the New Economy:

• Aadmi ko parakhna seekho (learn to evaluate (and find right) people (founders)) : Angel investing is an entrepreneur led asset class, and one must be able to make a bet on the entrepreneur. Need to have a long term outlook (7-10 years). Investors need to build a portfolio of angel investments, and not just 1-2 investments. One way would be to invest in funds that invest in angel funding rounds.
• New Economy Valuation Metrics: Older businesses were fixed asset heavy, and hence valuations were based on fixed book value (suitable for manufacturing, etc). New economy businesses are asset-light, and hence the metrics are very different: capital, user growth, stickiness, IP, data, cross selling. Since capital is abundant and has become a differentiator, cash flows and profitability will come down the line – both old and new economy businesses will co-exist. Fun fact: 80% of the market cap of NASDAQ companies are based on intangibles.
• Scaling and Pricing in India: There are ~ 400 million Indians in Tier 1, 2, 3 cities who are now willing to consume and pay for content (with average incomes of Rs. 3-5 lakhs per annum (4K to 7K USD)). Key for businesses is to price the products right – good examples are the ‘sachet pricing’ model used by Unilever in India to sell Rs. 1 shampoo sachets. Average value of each transaction in India is going up – Jio has 400 million users and has built a $10 billion+ ARR business in India.

5 Pillars of the New Order:

• New World Order: We are in an age of hyper-virtual globalization. Technologies such as 2D / 3D / AR / VR are bringing people closer in a metaverse, which will lead to hyper collaboration (vs. competition) and specialization. Gamers are building virtual social networks which is redefining the traditional social orders.
• New Business Order: Traditionally business used to be the playground of the rich – you needed capital, resources, infrastructure, government connections, land, risk appetite, etc). However, with todays democratized access to services, almost everyone has access to the same tools that Fortune 500 companies have. Pay as you go services such as Wix (for website building) have been used to build 100M+ websites
• New Information Order: Today, knowledge is truly democratized, and anyone can access free education across the world. Willingness to learn is key, as there will be ‘museums’ of information 10 years from now that will customize and personalize almost every aspect of life.
• New Human Order: Genomics and diagnostics will fuel life – with the advances in technology such as CRISPR and mRNA, death might just become an option by 2045. Today, late and mis-diagnosis is the 3rd largest cause of death globally. With technologies that have 99% accuracy is predicting infection onset, these new DNA code innovations will redefine the meaning of ‘life’.
• New Thinking Order: Over the course of human history, the best companies have been born out of depressions and crises (18 out of the 30 DOW companies were born in the Great Depression; Uber and Airbnb were built during the 2008 financial crisis; Flipkart was also built then). This covid pandemic will bring about a revolution in the minds – we will come out much smarter, much more resilient. Agility and speed in execution will redefine the upcoming era – hyperlocal businesses that are built efficiently will win.