India’s startup and tech market has finally hit product market fit: Elevation Capital’s Mukul Arora

In 2010-11, when Mukul Arora was travelling to Silicon Valley for work, he  felt wistful. The Northern Californian region’s booming technology market was the hotbed of venture capital and ambitious startups, while in India things were just about taking off. For many venture firms in the country, SMS still represented cutting-edge tech.  Arora, a young executive with SAIF Partners then, used to feel the Valley had the real action, while India was playing catch-up.

He couldn’t feel more differently now. Arora, already a partner at the renamed Elevation Capital for five years, has been a part of some of India's biggest and most successful startup stories – an early investor in food delivery firm Swiggy, online retailer FirstCry and commerce firm Meesho among others. His firm minted six unicorns– companies valued at a billion dollars or more– in 2021 alone. India too had a record 2021, with over $35 billion in startup funding and 43 unicorns being born, unprecedented in every sense of the word. Last week, Arora was promoted to co-managing partner to run Elevation– which manages over $3 billion in India — along with founder and US-based Ravi Adusumalli.

Arora's elevation cements his position as one of India's most powerful and influential technology investors- one who sits on boards of $10 billion companies, dictates what trends will attract the next wave of investor dollars, and where India's internet ecosystem is headed. In an interview with Moneycontrol's M Sriram and Chandra R Srikanth, he spoke about the next big trends for the firm, judging a fund's performance during a boom, and what separates Elevation from the hoi-polloi of venture firms and his views on Vijay Shekhar Sharma after Paytm's flop IPO. The interview was edited for clarity.

2021 was big for Indian startups in a way that no one expected. But it also accompanied fears of a bubble. Compared to other economies, where does India stand?

We have to realise that while India is compared to China and the US for tech evolution, it is growing quite differently. In the US,  the economy and per person income grew first. And then the tech wave came; If you look at China, both happened parallelly. In India, tech has penetrated, everyone has mobile internet, and we are still at that $2500 per person income and the economy is going to grow. Now the tech rails are already in place.

If you look at internet penetration in China, in any vertical- ecommerce, fintech, etc, it is 2-3 times of the US. In India, it is going to be even higher because people are already on the net. A  lot of businesses will just get built here versus first being built offline and then moving online. So the consumer-tech market has become much, much larger obviously. I don’t think any of us expected we would have so many $5-10 billion (valuation) SaaS (software-as-a-service) companies coming out of India. SaaS is having its Flipkart moment. When Flipkart became that large, everyone saw the potential in consumer tech.

Now you have a Web 3.0 and crypto, which is a level playing field for all countries. And given the quality of our talent, I think we have a great opportunity to actually leapfrog everyone else in that space.

Right. What other factors are influencing this?

The other question people had was, these tech companies make GMV (gross merchandise value, a generous proxy for revenues) or they get eyeballs. But will they ever make money? And I think that has also been answered very, very strongly in the last two years because especially after that first COVID wave. When we were locked in at home, all the companies went hard after their cost structures and most of them became Ebitda-positive (earnings before interest, taxes, depreciation, and amortisation) or contribution-margin positive.

Now a lot of these companies are public. So now Nykaa is profitable, and that's the start. In food delivery, both Swiggy and Zomato have healthy contribution margins in their core food delivery business. So that question is answered. Then there used to be a question that hey, in India, how do you get liquidity? There are no exits, only valuations keep going up. And in the last 18 months you have seen a very robust pipeline of M&As- 1mg, BigBasket, BillDesk, etc.

And with record capital flows, I think the Indian tech market has now finally hit PMF (product market fit, a pivotal moment for any startup when its product is finally accepted by enough customers and it can now scale). The next decade is going to be growth. Now that all the enablers are in place, how do we really capitalise?

Tech contributes 20% and 35% of GDP in the US and China respectively. In India, there is no published report but my sense is around 1-1.5%. And getting to lead a firm like Elevation with such a strong track record I can’t thank my stars enough for being in this position.

Mukul, do you think the current boom will continue this year? And hot deals are getting expensive to get into. How will you balance the need to get into those deals versus stretching yourself beyond a price or terms you would be comfortable with?

It is hard to say whether this year will be as active as last year for the overall market. See what we like to do, what fulfils us and excites us is to work with founders in really early stages, getting in super early and helping them get to PMF. And even today, I don’t think a lot of VCs are actually playing that role very actively, if at all. What has happened is, as funds have become larger, focus on the early stage has become less, so people are doing a lot of investments. And then if they hit PMF, you double down on them. Whereas our focus is very, very squarely on saying that we will work hand- in-hand with you pre-PMF, and will help you get there.

So when we are competing for deals, we tell them to talk to a few founders in our portfolio, who testify to the work we have done, so we don't have to pitch per se to them anymore. Now that doesn't mean I can make an investment at half the valuation of someone else. We don't mind paying 20-30% to work with the best founders because we are working for really big outcomes.

Mukul, how do you judge your fund's performance today? The traditional metrics, IRR (Internal Rate of Return), MOIC (Multiple Of Invested Capital) are through the roof for all funds because every investment is marked up. Then how do you know what's actually working or not working?

See, when we look at our own performance, we focus equally on input and output. The time horizon from investment to exit can be 8-12 years, quite long. Our primary metric is founder NPS (net promoter score). Do founders, a few months after working with us, feel like Elevation is the best partner they could have had? Are we contributing to their success?

Secondly, the metric is liquidity. You raise certain dollars, how many dollars have you returned? IRR, MOIC are classic proxies but it is finally about real dollar returns for your investors.

Got it. We also wanted to get your sense on last year's most awaited IPO- Paytm. It was a landmark moment for Elevation and the ecosystem. But given it tanked so badly, is there something different the company or bankers, etc, could have done? Anything you would have done differently?

I wasn't closely involved in the IPO process, but I have known Vijay (Shekhar Sharma) for 8-9 years because a few years into Elevation, I started spending some time with Paytm. I can tell you that after meeting so many founders over the last 10-11 years, Vijay is by far the most visionary founder we have in India. And I know I’m making a very bold statement, but I have no ambiguity about that. And if you reflect on that journey, it started out as a mobile VAS (value-added services) company. In 2008 this guy knew Marc Andreessen and what was happening in the US. I saw an interview of his (CNBC Young Turks) from 2008, and I was blown away. It was like a tech founder talking today. What he has achieved, from VAS to mobile internet recharge to a wallet to a super app to a full fledged financial services player- if anyone would have predicted those milestones, no one would have believed him.

So his understanding of where the world is moving, big shifts happening, what consumers are going to want and as a founder and company what they need to do-I don’t think anyone comes close in foresight and vision. And I don’t think there is any company in India which has gone through this kind of a transformational journey. So in the long run, I have zero doubt that Paytm is going to be a very very valuable company.

Mukul, Meesho, your investment, was one of the industry's biggest breakouts of 2021. What has worked for them?

For most founders, their biggest strength is either being a visionary or execution. I think Vidit (Aatrey) is the only founder who is very, very strong in both of those dimensions. Like Vijay, he identified that this shift is happening. Till the beginning of last year, we were completely focused on micro entrepreneurs. We made Meesho a compelling platform for them by creating the leanest, lowest-cost supply chain in the country. We had no logistics, we had no warehousing, we had no inventory, but we had the best supply and therefore resellers would get those products on Meesho 15-25% cheaper than any other platform in the country. And as a result, with zero marketing, we were seeing consumers coming onto the platform on their own. So Meesho was not marketing to end consumers.

And even as an end-consumer at that time the checkout flow was for a reseller, where once you add a product to the cart, it will ask what markup to add, etc, aimed at micro entrepreneurs.  Do you want to do, etc, which was the micro entrepreneur behaviour. Then Vidit felt that we have a very unique opportunity to build the Taobao (owned by Alibaba in China) or PinDuoDuo (Chinese online seller with a market cap of $75 billion) or Shopee of India, given we already had the capability.  Amazon and Flipkart were built for users like you and me- they solve for convenience over pricing.

By contrast, majority of the Indian market values price over convenience. They are willing to wait an extra day if they get the product cheaper. And Meesho had always been solving for that even for resellers. So we realised that this is a once-in-a-lifetime opportunity to democratise commerce. And that’s where around February-March last year, we really started experimenting with consumers, started changing the product to target end-consumers. And at the end of 2021 that shift has played out beautifully. So now, it is a really loved end-consumer platform, it has boarded so many new consumers to e-commerce in the last 12 months. I think around 70% of our orders and users are in Tier III cities and beyond. And to align the whole company culture, product and execute in that direction is why I said Vidit is phenomenal with execution.

If someone had said five years back, I want to build a TaoBao of India, no one would have funded them because you need so much capital, how will you ever compete with Flipkart, Amazon, etc. But I think things played out beautifully where the business was built for micro entrepreneurs. And that journey got us to a point early last year, where it was a very, very robust business supply chain business model. And that helped us lean into this B2C (business to consumer).

This is a two-part question. As far as food delivery is concerned, it has mostly been a duopoly, with Swiggy and Zomato dominating the market. But if you look at the scenario now for Swiggy’s Instamart, you have large conglomerates, standalone apps and then Instamart. Secondly if you have to give us two breakout themes that will work for you- like Meesho, Swiggy- what would they be?

Today it looks like they were always in a duopoly. But if you look at the 2017-18-19 phase before UberEATS merged with Zomato, UberEATS was very very aggressive at one point, losing money on every order at an unheard-of level. Similarly, Ola had bought Foodpanda, and you would remember all the cities were plastered with that buy-one get-one offer. So, in the early days, it was an equally noisy market where everyone realised it’s an attractive opportunity and multiple players were taking their shots at it. But eventually now it’s a duopoly and because of Swiggy’s execution muscle and customer obsession. At that time, they didn’t have a headstart. They had actually come from behind, having started after TinyOwl and Foodpanda.

Today, Instamart or quick commerce is at a similar point. Everyone realises it’s a very attractive opportunity and 3-5 years out, it is going to be a big market and everyone wants to get after that. But unlike earlier when Swiggy came from behind, today they have a lot of capabilities which are actually built out. They already have a very large customer base. They already have a very strong ops muscle and delivery fleet which is your essential ingredient in this category. And obviously they have significant capital. So this market is no different from where food delivery was. But Swiggy today is actually much much better enabled so if they could come from behind with none of the enablers and win in a super competitive market here, the odds are much more in our favour to really dominate the quick commerce market.

On the second one, there are two very big themes that we are doubling down on- SaaS and Web 3.0. From our current fund almost a third of the money is in SaaS investments. That was never the case.

Is it also because you kind of missed the first boom of SaaS? Freshworks, Druva, even a Postman or Chargebee later on.

I would say so. Yes, we were late to the opportunity. But in the last 2-2.5 years, we have over-indexed on that. We are not just investing, we are also building differentiated capabilities in that area. So, for example, we have set up a team in Salt Lake City, Utah (also where Arora's co-managing partner Adusumalli is based). Salt Lake City is a big SaaS hub in the US, and they have probably the best sales and Go to Market (GTM) talent in the US. So we have set up a team there. And the idea is that when we invest in SaaS companies based out of India, for all of them the US is their largest market. So can we help them build their GTM team, sales team and help hire their leadership in the US? And that can really increase their chances of success.

And Web 3.0? (Said to be the new era of the internet where businesses will be built on blockchain rails and where the metaverse could be mainstream)

This is an area where in some ways a platform shift is happening. And historically, whenever platform shifts have happened, they create a disproportionate share of overall value creation, whether it was from desktop to mobile, mobile internet, etc, or Web 1.0 to Web 2.0. So we don’t think this will be any different. And that’s where, again, we are investing aggressively in that area. So this year itself I think close to 15% of our capital has gone into Web 3.0. And going forward, that will only increase.

And of course, consumer tech, consumer brands, and fintech are our bread and butter and the focus there will continue.

Did it take time for you to build conviction on Web 3.0? Some investors still wonder whether it is a fad.

We were not actually worried about that. If I look at some of the early Web 3.0 businesses, they were more at the application layer for Indian users. And there is a regulatory grey area, which was making us take a pause. But now we are seeing Web 3.0  businesses being built globally, from India, for the global market. Polygon is a great example. It’s a platform being built for the global market. We are seeing a lot of startups coming up at the infrastructure layer. That gets us excited.

When you speak to founders in your portfolio or otherwise, what’s the biggest challenge that they have in the current environment?

So, in the current environment, the number one challenge is hiring. Even earlier, our advice to every seed and Series A founder after raising capital was that you should be spending at least 25-30% of your time on hiring. Today far fewer candidates join you after meeting you. The RoI (Return on Investment) on that time spent is very low. And then the founder feels, I could have made more progress with people I have versus trying to hire. So it’s not easy in their shoes. But even now, the idea is to spend disproportionate time on building out that team in the early days, but it is very, very hard.

What do you think sets Elevation apart from other VC funds?

In our mind, it is our ethos of that zero to one, like partnering with founders very early and working with them in the trenches till they find PMF (product market fit). And that’s the hardest part of a startup journey. Once you find PMF, capital today is a commodity. There are enough and more investors who will give you capital. But there are very, very few investors who will work with you before PMF in that zero-to-one journey where you will have multiple stumbles, multiple failures before you hit that mark. And that’s what we believe really differentiates us. That’s what our portfolio founders tell us really differentiates us. So that’s the ethos we want to maintain going forward as well.