Episode 5: Karthik Prabhakar- Indian Venture Capital and Early Stage Technology Landscape
About Karthik:My next guest on The One Percent Project is Karthik Prabhakar. He is the Executive Director and Partner at Chiratae Ventures. Karthik, for three consecutive years from 2016 to 2018, was recognized as one among the 40 Under 40 in the alternative investments space in India by AAAIF. He is also recognized amongst the global top 100 Rising Stars in the venture industry by Global Corporate Venturing.
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In this conversation, he talks about:
His learnings as a Venture Capitalist.
How he assesses early-stage startup ideas and teams.
Is branding important for early-stage startups?
A new Indian consumer base that COVID has opened up for startups to tap into and sectors that will get a boost due to the pandemic.
How foreign entrants such as Amazon, TikTok and others were able to scale in a heterogeneous market such as India?
Zoom's supremacy over all the other video conferencing products in the markets during the pandemic.
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Transcript:
*The transcripts are not 100% accurate.
Pritish: Welcome Karthik to the One Percent Project. It's a pleasure having you and would love to know about your background?
Karthik: Always a pleasure interacting Pritish, and indeed interesting times as well were in the past we've met in person. I think the new reality is videoconferencing and virtual meetings are going to become a norm. And people will be comfortable with that, so that's a quick background about myself. I'm one of the partners at Chirate Ventures. We are one of the leading early-stage venture capital funds in India, investing since 2007 Invested over 80 companies in the technology space, in the likes of Myntra, Lenskart and Firstcry and more recently companies like Nestaway, Bounce and CureFit. In the enterprise space companies like Uniphore, Manthan in the earlier days. In the FinTech space companies like Policybazaar, EarlySalary so on. In the Healthtech space companies like Sigtuple and, Onco and a few others. And more recently also looking at some seed opportunities in the DeepTech space, invested in some very cool, new product innovations I must say. So overall in the last 13 years, I've been with the firm for close to 10 years now. I joined as a summer intern from a B School. It was a chance opportunity. Prior to that, I used to work at Intel as a technology person, and my aspiration to join B school was also to essentially just climb the ladder from pure technology to product management. And through this chance internship, I kind of liked what it was in the venture space. Technology investing seemed interesting, and I kind of jumped pull in and no looking back last ten years has been fantastic. I've invested in a couple of investments across consumer and FinTech. I also have the responsibility of heading the global business development and relationships. , so I think that's a quick background about myself.
Pritish: What are the frameworks and the models that you apply when you're investing in these early-stage startups?
Karthik: In the early stage, I think it's a cliche, but the biggest thing that we look for is the team. The second thing that I'm looking for is this a product sort of solution, which is going to create a sustained differentiation over a period of time. And I'll explain a bit in terms of what I mean by that. So team is, everyone talks about the team that we back team. What does it mean? I'd actually kind of started to appreciate that more recently, having been on the boards of, five, six companies that have invested and seen their journey and seen the ups and downs that companies have gone through. What I really see is the leader's ability to attract and achieve things with severe resource constraints. I think that's the quality of a great leader and that's what we need as entrepreneurs. And when you're trying to solve a problem and go in a path, which is uncharted, the three early indications are with no money; no investment yet is the founder able to attract maybe co-founders? That's one quality, is the founder able to attract very good talent into the team? Where you're not offering boatloads of money, but they're offering a promise that offering a vision. I'll usually just tell that vision, somebody, how passionate are you in being able to articulate that. So some of these things. Clearly defines how a founder and founders are able to shape an idea into a product. The second element, which I also look at in terms of the team is their resilience, have they actually had failures? Have they been through a tough situation? Or has it all been rosy? So, my own personal mental math. And if somebody has just been out and out success all the way and did not have a very tough situation. I will rather meet because I think I don't want to be the person on which that experiment happens. It's important. It's very important to go through that because resilience is built failures. And it's a cultural thing in India where failure is not so well accepted, although of late it is more so, it is very important to see that and how did they come out of it and how are they able to come out in future as well? In terms of the idea of the product, the mental model is, at the back of the envelope. What we try to do is if I'm investing X million dollar for a person in a state, can I visualize this product to be something which can create a 10x for my investment in a five to six years time frame. Now all of these are excellent models, so they don't work, but at least on excel, are you able to visualize something like that and test the assumption for hitting that rate. Those two are a very important metric that I look for and third metric, which is always in the back of the mind, but I consciously try to stay away from are there comparisons in U.S or China? I think it was a model that used to work until, maybe 2016, 2017. But after that, if you really need to back something, which is going to be unique and first of its kind, you've got to stay way and constrain your mind. So one of the things as a VC or as an investor is also constantly to keep learning and not succumb to the confirmation bias, because of past experiences.
Pritish: Brilliant. Staying on the early-stage startup, thought process, how important is brand building. And most of these guys don't have deep pockets. So what is your way of thinking, and how should they go about building a brand?
Karthik: Brand building is not important in my mind. It's not a worthwhile use of time or money or effort. Early-stage focus on building a great product or a great solution brand will get built. What's very important is your first set of customers should come not because of the brand they should come because of the product or the solution. Short answer, forget the brand. It doesn't matter. One of my investments is a company called Shi Fu. They have built an augmented reality-based toy. What they've done is there is a physical product and the gameplay and experiences on the mobile app where the augmented reality experience is coming in. The company kind of is almost a 500% year on year, and now they're thinking about, how do we make sure that there is a brand, to make sure that the next phase of growth happens. But in the early days’ engagement, everything really happened because of a good product and customer engagement and happy customers.
Pritish: Coming to the COVID situation we talked before we started this interview that now we have come to an understanding that's the new normal. you have been sharing your thoughts on work from home best practices and how we should interact and go forward during the lockdown. What are your thoughts of the unlock down of India, and how should we conduct and go forward?
Karthik: On the business side, in terms of opportunities, I think one of the things that this has done is it created some sort of an inflexion point for many entrepreneurs and startups who have been targeting the digital consumer. So the digital computer at some point has got capped at maybe 80 million, 100 million conducting users in India. And everyone was after 80 to 100 million transacting users. The rest 500 million internet users are mostly there in terms of consumption. And the question was always, how do you actually tap these consumers and then there was this cost-benefit on, you know, does it make sense to acquire these customers when they use? What is the LTV to CAC? And so on and so forth, which is where some of the startups also start saying okay after my initial entry in India, I think my prudent thing is to actually go outside India, go build for consumers there, and then come back after. This was one, the second approach was let's just keep building more and more consumers, and monetization will happen sometime later. These were the two models which were prevalent, but what the current situation has done is it's probably pushed up that transacting user in India from that 80 to a 100 million slightly higher up. I don't know the exact numbers. I am sure research experts will all come up with those numbers, but the order of magnitude, clearly that is an additional large consumer base, which has been created in India. Who are trusting and comfortable in transacting on the internet and mobile. I think the infrastructure which has been developed around, which is UPI and Google pay, PayTm, all of these have definitely helped in that. My own feeling is one big thing that will happen is that it is going to be a much larger market for internet mobile stories. So the consumption is going to be even bigger. So what people were expecting to happen two, three years down the line that's happened in two or three months, that's one big change. The second thing which is on the softer element is I'm hoping, I don't know, but I'm hoping that I think the general awareness around discipline and, hygiene and a few other things. Is also going to go up, which also means that, focus on, preventive health care, focus on wellness focus on healthy habits is all gonna increase, in various different stages. What it also means is that the investment somebody has to do in, even if it's a food business the investment somebody has to do in technology to ensure that quality of, food preparation is there is also going to increase. So I think there is a lot of, interesting new avenues which will crop up that's were I see the opportunity.
Pritish: What industries do you think are going to get a boost because of the COVID situation?
Karthik: One, clearly is that I think entertainment. Entertainment is going to go up through the roof. A lot of content creation and, on-demand content is going to go up significantly. No more constrained by pulling people into a mall or a theatre to watch a movie. You can actually create custom content. And there is going to be loads and loads of that. The second thing is gaming. I think that will kind of pick up; I was just reading yesterday about, one of the games which got sold recently. Where they were kind of content and you could kind of collectively together and decide what will be the next plot. And depending on that, the content gets built up. It's actually a community engagement and watching the content of some sorts. Content and entertainment is one area. My own feeling is, enterprise solutions, which are targeting SMEs, will start seeing some light of the day. It may be small, but people will start investing in technology because they understand now that you can't rely on complete offline, handling of things. Healthcare I talked about, health consciousness will go up in a big way, which also means food industry will benefit a lot more healthy eating will pick up, the insurance industry will get innovative in creating more products. And I think there is definitely a scope for more hardcore product innovation that can come up. I don't know when it will, but we have invested a few, new age, DeepTech companies across robotics, AR VR and a few others. So I see some of these coming into the mainstream where shopping experience can be augmented with AR things like that, which I feel could definitely benefit.
Pritish: If you talk about the Indian consumer, I broadly would break down into one is India the other one Bharat and India is basically the educated, English speaking upper middle class and above 150 to 200 million people. And then comes Bharat, which is segmented educated, but potentially their communication lines are more regional with different dialects and languages. How do you see the international, entrants, like the Chinese apps or even the American products Amazon and TikTok ByteDance?How are they able to get into, Bharat? Given that now they have been successful with the India part of the consumer base.
Karthik: I think it boils down to having somebody who is, on the ground and understand that very, very well. So if you see how they've been able to capture the India market, the educated market as well is because there's somebody on the ground understand the cultural nuances and the needs of the market. In the past, if you look at say search engines and stuff like that, I don't think they needed, the physical presence when the initial start off happened. So for a Google or Facebook to come, I think the fundamental thing was India is a society where communication and engagement is the key values, and to that extent, Facebook was natural in into India. Whereas if you take TikTok into India, you talked about again expressing. Oneself is very natural for people and people want to. So it takes a very natural. So to that extent, the high-level cultural nuances for the country are documented. The market is wide open. So the market is not restrained. Having said that to further and to expand a business, what anyone would need is somebody on the ground who understands those cultural nuances at the same time is fully committed to the business. And which is what we tried to look for, then looking at an entrepreneur. So be it an American or a Chinese or a European app to kind of scale-up and requires more than word of mouth. What it requires is almost a entrepreneurish person on the ground. So if I gave a few examples where you don't need any of those like the gaming companies earlier, Angry Birds just took off because of word of mouth. Then Pokemon just took off because of the sheer word of mouth and vitality. So either there has to be vitality were there are strong senses around you, or there has to be someone on the ground.
Pritish: What is the secret sauce that the Chinese companies or the Chinese apps have figured for India? Because definitely, we have the tech talent. We have all the smartest brains. What have the Chinese figured out, which we are also figuring out, along with them?
Karthik: I think it's more about they have seen the value of rich engagement and monetization follows. Whereas I think we kind of look at monetizations sooner. They're comfortable sitting on engagement for a long time. In India, we've actually seen in the past as well in I hear stories. I was not in the industry then, but I hear stories from some of the senior people were in 99, 2000 as well, there were so many stories and so many pitches off, we have so many eyeballs, so many eardrums and things like that. Which got funded and everything went down the drain. And it's also about the access to continuous capital to ensure that you can continue to sustain so to that extent, what some of these platforms have been able to do is create a very high, engaged user base. But my own personal conviction or suspicion is that the moment you start charging these users, they will drop off. The loyalty in India is very, very low, purely for a platform. So unless it is a must-have very hard to monetize. So I think it's something to be waited and watched if you have to turn on monetization is it still sustainable? There are some examples where they have got huge engagement, and they have turned on the monetization. They continue to scale. DailyHunt is a good example.
Pritish: That is a very good segue into trying to understand a global phenomenon which was accelerated because of COVID is Zoom. There are so many VC products and services available in the market, but Zoom got the most traction. What did these guys do right?
Karthik: In one word, I think it's really customer experience. They nailed it head-on across two, three elements. One is, getting onto a Zoom call was as simple as just clicking a link. Nothing else, no downloads, you just click the link and you're on. Secondly, they got it right in terms of audio and video quality. but yes, they had, challenges in terms of security and stuff but security is the second grade in India. I mean, people don't mind just putting out their passwords on their desks or keeping the ATM pin in the same wallet where their ATM card is. So I think that's what they got right. You know, if you take any of the others, they were still catching up. If you take Skype that you needed to have a user ID, you have to log in; somebody had to help you with that. So I think a combination of freemium product and easy to use interface is what probably needed really go viral.
Pritish: Yeah, I think that's absolutely Bang on because if you look at Chinese apps, the ease of signing up or using the product without putting in your email or the registration process is amazing because these products let you use or consume the product without any deliverables, to a very large extent. And when you're into it, then they will ask you to sign up. So their consumer journey or interaction journey is hassle-free two-third of the way. So I think that is something that really worked for Zoom one click and you're on. And I think the Western or in the Indian world as well, wants your username password or whatever, instantly, the minute you click. Thank you very much, Karthik. It was a pleasure speaking to you, and thanks for your time.
Karthik: Thank you very much. Always fantastic talking to you. And I hope we can meet in person very soon.
Pritish: Absolutely looking forward to it.