On this special episode we have our three partners Sanjay Swamy, Shripati Acharya and Amit Somani discuss what happened in 2023 across the global and Indian startup ecosystem. They deep dive on GenAI, ChatGPT, the India Opportunity, ‘funding winter’ and many such themes that dominated the world of startups! 

Listen to the podcast to learn more about:

00:00 - Preview of the Podcast

01:20 - ChatGPT and GenAI in 2023

14:24 - Indian Startup ecosystem in 2023

19:39 - Exciting sectors and trends in 2023 

25:33 - Top performing startups of 2023

35:36 - Why are well funded startups failing/shutting down?

38:58 - What is the ONE thing startups should focus on in 2024?

43:50 - Personal takeaways & Closing thoughts

Read the complete transcript below:

00:00:00 Amit Somani

To me, 2023 was the year of, you know, survival of the fittest.

00:00:03 Sanjay Swamy

The new word in some ways, you know from the tech ecosystem was hallucination.

00:00:08 Shripati Acharya

It is the customers who decide product market fit, not investors.

00:00:11 Amit Somani

Why are some well funded startups failing? Or, you know, shutting down?

00:00:16 Sanjay Swamy

Good companies never die of starvation, but they could die of indigestion.

00:00:20 Shripati Acharya

So what is the one thing that you would like startups to focus on in 2024?

00:00:32 Sanjay Swamy

Hi everybody. Welcome to our year end podcast. It's been an exciting year 2023 and this is me Sanjay Swami with my partners Amit Somani and Shriipati Acharya just to discuss and chat about what happened in 2023 right. Notably with respect to.

00:00:51 Sanjay Swamy

The world of startups, the Indian startup ecosystem, some of the notable things that happened, things that did perhaps didn't go to plan

00:01:00 Sanjay Swamy

And uh, so maybe I'll kick it off with something that came out of nowhere, at least for the whole world. I think a company that nobody had heard of, probably the same time last year, is something that everybody wants to know about and they’ve signed up and are paying, you know, $20 a month in subscription, is Open AI’s.

00:01:20 Sanjay Swamy

Product ChatGPT.  I've been very excited using it for a variety of things. 

00:01:29 Sanjay Swamy

To me, it feels like it's a step function change and you know the way forward for all of us in this industry, especially in the tech industry. Amit, maybe you can talk a little about your thoughts, about what you saw happening in 2023 in particular to this area of Generative AI (GenAI) and your views on the same.

00:01:48 Amit Somani

Sure Sanjay. So before I do that.

00:01:50 Amit Somani

To me 2023 was the year of, you know, survival of the fittest.

00:01:54 Amit Somani

I think we often say, and I think you say this a lot, right. Startups are 360 days of pain and 5 days of glory. I think this year it was 364 days of pain and maybe one day of glory. And so I think everybody learned to adapt. I think there's this beautiful Charles Darwin quote “It's not the strongest species that survives, not the fastest, but the ones that are most adaptable to change”

00:02:15 Amit Somani

And I think everyone adapted. People who couldn't raise money, people who are to manage with the $500K bridge, people who went and raised 10, 20, 30 times, or what they were raising for their IPO rounds. So I think we learned to adapt as an ecosystem. And I think that's very, very important, especially at the vantage point that we are at an early stage startup. You need to adapt to all kinds of market timings and scenarios. 

GenAI is obviously very exciting, but I know Shripati is going to talk a little bit about that, but it is just as you know, mind blowing and as changing as perhaps the Internet browser or client server computing or so many of these other things. So, I'm very excited about that as well.

00:02:56 Sanjay Swamy

Terrific. Shripati, your quick reactions to the year?

00:03:01 Shripati Acharya

To your point, Sanjay - you know ChatGPT got 100 million users in 2 months that probably speaks and captures everything about what a phenomena it has been in 2023. In 2024. I feel it's just going to be a part of every application. So we're not even going to be talking about it just as we don't talk about an application which is on mobile or it's on the cloud.

So, I probably feel that from a technology standpoint, it was a defining and very seminal event.

00:03:29 Sanjay Swamy

Terrific. Yeah, I've been using it a lot. In fact, this morning I was playing around asking, what were the highlights of 2023? So I'm going to read out a little bit of what ChatGPT  had to say about the highlights of 2023. Of course, it praised itself a lot, but it also talked a little bit about the startup ecosystem, and a few of the things it pointed out specifically about the Indian startup ecosystem. So, it talks about the funding landscape and it was pretty accurate. It talked about the startup ecosystem having a decrease in funding, you know, falling 72% to 7 billion dollars in 2023 from the previous year.

00:04:10 Sanjay Swamy

It wasn't hallucinating, unfortunately, and these are facts you know! It also talks about some notable companies that had, you know, good IPO 's, we had the recent Mama Earth IPO, pretty much as a resurgence of the public companies in India with Paytm and Zomato and so on as well as some of the growth companies like PhonePe raising substantial amounts of money, Perfios, Zepto amongst the others. So it was pretty clued in actually on what was going on. It talked a lot about some of the government policies around taxation and some of the implications. It talked a lot about the ecosystem growth, talked about sector highlights like EV becoming a hot space here in India.

00:04:52 Sanjay Swamy

So generally I thought you know it, it did a pretty decent job in terms of analyzing or in having data about what was happening recently here in the Indian startup ecosystem. 

00:05:02 Sanjay Swamy

A word for me that was a new word from the tech ecosystem this year was ‘hallucination’. We all know in theory what it means,  but Shripati since you've been following some of this, maybe you can talk about it?

00:05:16 Sanjay Swamy

Some of the limitations of, you know, generative AI at this current stage and you know what is this concept of hallucination?

00:05:23 Shripati Acharya

Yeah. So interestingly, generative AI is a computer, in which case the output is not deterministic, meaning that the same input is not going to give the same output every single time.

00:05:38 Shripati Acharya

And what that means is that it's going to go ahead and predict things it doesn't know, it's just going to take its best guess at it.

00:05:49 Shripati Acharya

And that's the hallucination part. And so what it means is that if you ask a question, you might ask a question, what is 2 + 3? It might say 7. It won't say I have trouble with this and it's 7, it will  just say it's 7 and then you might say that sounds wrong.

00:06:04 Shripati Acharya

For which it might say, Oh well, oops, now it's 5!

00:06:07 Sanjay Swamy

Right. Sounds like a venture capitalist who wants to pretend that they know everything. I'm just

kidding!  

 

00:06:25 Shripati Acharya

Yeah. So that's the hallucination part. But the hallucinations can both be positive or negative. The negative part is obviously straightforward when we want very clear and precise answers, it's wrong, but when you're looking at generative AI, for example:

00:06:33 Shripati Acharya

To create art, or generate images or sounds in that particular case, or even doing creative writing. Then the hallucination part of it can actually give it a level of creativity which is exciting and very interesting in that particular domain.

00:06:47 Sanjay Swamy

Yeah, I tried some cricket scripts. For example, I said imagine it's the last over of the World Cup. Of course, I was always dreaming that India was going to win. And I said, you know, it's the last over and India needs 30 runs to win and Shane Warne is bowling. And it came up with some really good scripts. Of course it did meet my requirement that India had to win.

00:07:06 Sanjay Swamy

That was, I guess, a hallucination in its own right

00:07:11 Sanjay Swamy

It has been quite fascinating. I've been using it certainly for, you know, script writing for, you know, scenarios writing, an essay, you know, this morning I posted a couple of tweets where I asked ChatGPT to describe the AI world for a layman who wants to appear sort of relatively knowledgeable in  their Christmas parties. It did a really interesting job, gave me some good examples around, you know, autonomous driving around healthcare and other interesting insights. 

Amit, so when do you think we are going to start seeing startups that are truly leveraging the platform of generative AI and actually making an impact in the market.

00:07:59 Amit Somani

Actually, interestingly, Sanjay, we are already seeing it.

Like Shripati said earlier, it is more like, you know, you're built on mobile or you're built on the Internet or whatever. I think the question is what is the use case that you're solving and that’s where people are still early in the journey, including ChatGPT itself, although you know, several of us are paying $20 a month, how do you monetize this is the question?

00:08:23 Amit Somani

So how will a customer end up paying for this? So how do you tie it to what is the business outcome that you're generating? Are you helping me be more productive or be more effective or just entertain me or help me make more revenue or be more effective or efficient in some way?

00:08:36 Amit Somani

So I think that probably the incumbents haven't really adopted it. And incumbents, I don't mean Microsoft and Google and OpenAI and so forth. I mean like an HDFC Bank or so on. I think that will be like much later. But in practical terms, whether it is helping sales Rep, it's helping doctors, whether it's helping content creators, you know, like doing this podcast. It's already helping us. So I feel like the impact is there. I would say that the monetization is probably going to take a couple of years to be able to prove.

00:09:07 Amit Somani

Also, along the lines of the hallucination question you asked about, I think, explainability and you know how it is saying what it is saying is going to become very, very important as well, right? So I want some level of trust. So if it was a doctor using ChatGPT or something like that, some kind of open AI model or an LLM to answer something.

00:09:30 Sanjay Swamy

Or an example of a bank underwriting a loan.

00:09:32 Amit Somani

Or a bank underwriting a loan, or you getting a recommendation for your stock portfolio. As you know this is the mix of stocks I have. Would you recommend it and if I ask it a second time and it gives me something.

00:09:42 Amit Somani

And I'm like, wait, what am I supposed to do now? Right. So I do think it is already beginning to have an impact. I think it will probably take another year or 2 for it to ‘Cross the Chasm’, in the Geoffrey Moore sense, to get to a vast majority of companies using it and implementing it.

00:10:02 Sanjay Swamy

I can certainly see when it comes to actual concepts that are well known, well researched, that need to be explained right, like you go and do a blood test and it says some parameter is off and your doctor says you got to fix it.

00:10:15 Sanjay Swamy

Doing this, but if you really want to understand it, you just upload the report to ChatGPT and I tried a few experiments with it to see and it did a fairly decent job of explaining the report and why it is recommended in this range etc. But you know it's not a serious issue if you're 10% over or something like that. 

00:10:37 Sanjay Swamy

Anything around customer service, customer interaction, explanation to the next level for the more curious customer, I think it can play a really valuable role. But I think as you say, we're seeing some early offshoots, early startups in the whole GenAI space.

00:10:50 Sanjay Swamy

One of the things we were discussing the other day with another fintech entrepreneur versus whole space of credit underwriting, right and some of the ethical issues around you know, some of the same person as you said you know might be eligible for a loan but with the same input somebody else might not be eligible for a loan.

00:11:11 Sanjay Swamy

And I think my point is that.

00:11:14 Sanjay Swamy

I think there are ways away from, you know, AI being used for some of these use cases, but the scaffolding around serving a customer, the customer support aspect, the onboarding of a customer there, I think it can still, it can start playing a valuable role immediately.

00:11:34 Shripati Acharya

I think that to Amit 's point, right that he talked about which are the areas where we are actually going to see an immediate impact. I feel that given ChatGPT is not exact, it is good but not exact.

00:11:49 Shripati Acharya

The areas where we can be most comfortable using it is where there is a human in the loop. Quite paradoxically, what it means is,  take a case of where it is a copilot for code writing like GitHub copilot.

00:12:03 Shripati Acharya

It is assisting me in creating code, but ultimately as a coder I’m using it to review it to make sure whether it makes sense and it's helping speed it up right. So if you think about your case which you mentioned, Sanjay, about giving you health care guidance, so to speak, right, it's not a doctor.

00:12:23 Shripati Acharya

It can give you guidance, but you will need a doctor in the loop to actually really verify that and it will make the job of the doctor faster. So I feel that that's actually a critical piece you need to understand about applications that it's going to be very effective where there is going to be a human in the loop which is going to oversee this in that case.

00:12:43 Shripati Acharya

Is accelerating that particular piece and the second point to our explainability and observability.

00:12:49 Shripati Acharya

The more complex a problem it is solving, the greater is the need for explainability and observability. So for example, would you be comfortable flying in a plane, the autopilot of which is written entirely by that GPT, right? 

00:13:10 Shripati Acharya

We won't, because we would want to actually have somebody who has overseen that and says yes, this actually looks good. So I feel that the observability piece is actually very important and transferring the explainability is very important. 

00:13:27 Shripati Acharya

But it's also going to be very hard because fundamentally what's happening is that ChatGPT takes the entire Internet's worth of knowledge and energy. It has been trained to compress it into these weights, which are, you know, in the case of Lambda, say, 7 billion parameters, right.

00:13:39 Shripati Acharya

So it's lossy is basically inaccurate compression, and then there is this code which is taking that compression and giving you answers out of it. So I think those are getting explainable. 

00:13:57 Shripati Acharya

And the more interesting and more difficult the problem we are going to solve the more the need for explainability

00:14:02 Sanjay Swamy

Got it. So it's still very, very early days. It's probably going to mature over the next several years to get to, you know, mission critical use cases, so to speak, right. So we will step back a little bit, right dive directly into this big topic that everybody is talking about. But to step back a little bit, 2023 as a year, you know with the real stuff going on in the startup ecosystem.

00:14:24 Sanjay Swamy

And specifically around the Indian startup ecosystem, which is where we are primarily focused.

00:14:31 Sanjay Swamy

You know, Amit, you talked a little bit about uh, you know, meat and potatoes businesses, you know, just focusing on the real activities and you know, making themselves stronger, long lasting businesses.

00:14:46 Sanjay Swamy

We saw some pretty nice outcomes to the end of the year , like Mama Earth going IPO etcetera

00:14:52 Sanjay Swamy

Yeah. So how are you looking at startups? Has something changed between the mindset and of course, 21 and early 22? And have things now matured and do you see this as a framework for the generation of startups for the next 3 to 5 years?

Would you like to comment?

00:15:14 Amit Somani

On that, and then, sure, so Sanjay, unfortunately, I'm sort of nearing 9 years in VC with you and Shripati.

00:15:22 Amit Somani

I have already, even in 9 years, seen so many of these hype cycles, right the herd mentality. We were all going nuts in 2021 in 2015 and we were all like the world is going to come to an end in March 2020 when COVID happened, right. So at least the current, you know, Zeitgeist is to be profitable.

00:15:42 Amit Somani

Be very focused on unit economics, be focused on sustainability, literally and figuratively. So I'm hopeful that this doesn't go away because it's how really long value companies are built. One of the biggest critiques of the Indian startup ecosystem was lack of exits.

00:15:59 Amit Somani

And in particular, exits in the Indian, you know, domestic kind of IPO market. I remember when a company I used to work at earlier MakeMyTrip when we went IPO and the board meeting before it was decided that we would go IPO NASDAQ and people are like no, there's no way we're going to list in India this is 2010/2009.

00:16:20 Amit Somani

And now everybody wants to come list in India. We have beautiful, successful examples, right? You cited not just Mamaearth, but so many others, right? PayTms, Zomato, policy bazaar and so many others who have their red herrings approved.

00:16:35 Sanjay Swamy

And reverse flipping. That's happening as a result of it

00:16:37 Amit Somani

And the reverse flipping that's happening, right? So, you know, the attractiveness of these sectors and the appreciation of these sectors. And tech companies are becoming a lot more viable, not just with institutional investors. Even with domestic retail investors, right? So, so very, very exciting for everyone. For the founders, for us as investors to say there are many, many exit options. You don't just have to list in the US if you ever get there, nor do you need to only think about.

00:17:06 Amit Somani

You know, just doing an M&A or something like that. So I think I am hoping that this way of really building viable companies and not chasing growth at all means at all costs of you know circa 2021 or even 2015 is here to stay. We'll see how long it stays. But I hope some of these scars and these lessons remain as we go forward.

00:17:26 Sanjay Swamy

Wonderful. So you touched a little bit about exits maybe?

00:17:30 Sanjay Swamy

Shripati, can you talk a little bit, you know, we've had a few exits in our portfolio,

Especially over the last 18 months, you know? So maybe you know, different types of exits, right. U.S. company acquiring an Indian company, domestic startups acquiring as well as we've seen in the ecosystem some larger players. What are you seeing there from the M&A marketplace?

00:17:52 Shripati Acharya

I would say that the M&A in India, where tech companies are acquiring other Indian tech companies, still is in its infancy. I think we have a long way to go and in order for that to happen, we need to have hefty tech companies in the market, and it's beginning to happen, right? 

We already have the large players, you know, the unicorns razor pay, which acquired one of our companies, Cred which acquired another one of our companies. Of course, Zomato as Amit mentioned PhonePe, Flipkart, Swiggy - all these guys are fairly large companies, we just need a larger and more critical mass of these companies for the Indian market to actually become more active. 

00:18:40 Shripati Acharya

I do expect the US strategic acquirers to be very active next year, because at least we hope and believe that the environment is going to become a bit more positive going forward already, at least in the public markets. If you look at SaaS companies, there has been a steady flow of earnings being beaten.

00:19:00 Shripati Acharya

So these are the last couple of months where the earnings have started coming out. And so I believe that we have sort of hit a trough at least in the B to B side of things and what that means is that as these companies start now growing, they start getting all of them were actually suffering from a less than 100% dollar based net retention, right?

00:19:22 Shripati Acharya

Which is not a good thing, but now those are actually beginning to trend up over 100%, which means that your customers from the same set are actually giving you higher revenue this year than they did last year.

00:19:34 Shripati Acharya

All of these things portend well for the SaaS ecosystem going forward.

00:19:39 Sanjay Swamy

Terrific, terrific. So maybe let's switch gears and talk a little bit about sectors, right. You know we have traditionally done a lot of you know Fintech and this year again we've been very active, you know, announced investment in Punch. We've announced our investment in Navadhan. There's another fintech deal that we're, you know wrapping up right now. So that's been of course an area that continues to interest us and you know maybe we can dive into that a little later.

00:20:05 Sanjay Swamy

What are some of the other sectors that you know each of you are seeing as really promising, really exciting ones, of course we talked about AI in general more at a horizontal level, but maybe Amit, you can start with, you know what is really exciting you right now.

00:20:21 Amit Somani

Sure. So Sanjay spent a lot of time this year looking at B2B businesses, although we didn't really make any investments, but that's definitely an exciting area.

00:20:31 Amit Somani

That we are going from the pure B2C you know, favor and vibe to, you know, businesses themselves adopting tech businesses themselves are doing interesting areas. So that is one interesting area. The second one, which I know you've teased me a lot about is travel, is very interesting not just for 2023, but I'm hoping for 2024 as well. 

00:20:50 Amit Somani

So I think there are some interesting new opportunities that could emerge around travel. Other than that I would say you know another mainstay other than fintech is SaaS. So SaaS and SaaS plus Gen AI. Shripati had a nice blog post on this on LinkedIn. I think that is a very interesting area.

00:21:08 Amit Somani

All that said, you know, we're still continuously surprised by the ingenuity of entrepreneurs. So we've got interesting companies from, you know, healthcare to logistics to, you know, even the new coming of sort of ad tech, right. So I think all kinds of interesting bottoms up opportunities which are not necessarily sectoral as as you were saying, those are those are some things that come to mind.

00:21:32 Sanjay Swamy

Shripati, are there other areas that you're looking at?

00:21:35 Shripati Acharya

I'm. I'm very excited about gaming and gaming in India. India has 450M mobile gamers.

00:21:46 Shripati Acharya

Let's take a step back. 450 million mobile gamers, I think we're one of the largest gaming markets in the world.

00:21:53 Sanjay Swamy

That's twice the adult population of the US by the way.

00:21:55 Shripati Acharya

There you go right after China, so India is the largest mobile gaming market. Traditionally the critique has been that the Indian users play but they don't spend right, the ARPU is low in India and that is true. ARPU will be low in India. 

We have a lower GDP per capita, it will be lower than in the US and other developed markets, however, I think that the generation which started playing grew up on mobile gaming during COVID, which is now growing up and now having discretionary income.

 

00:22:31 Shripati Acharya

It is now at a stage which views gaming as the primary entertainment screen more than TV, more than more than the laptop, so this is extremely exciting.

00:22:44 Shripati Acharya

Here, and specifically in gaming, I think we're going to see the emergence of mid-core games. We are very familiar with casual and hyper casual games, but mid-core games which combine a little bit of session persistence across users, larger engagement times and so forth will start coming up and we'll also start seeing more.

00:23:05 Shripati Acharya

Indian games. So India has seen an explosion in revenue, which has gone 3 X in the last 3 years, but it has been on the global franchises. But I'm very confident that the next big game in India will be an Indian game.

00:23:22 Shripati Acharya

I'm very excited about that. 

00:23:23 Sanjay Swamy

Very cool. Yeah. And I think as you say, because there's such a large market right here and it's quite likely that the game will get critical mass here. And of course, with the Indian diaspora and stuff like that, I think there is no reason to believe why it shouldn't be an Indian.

00:23:37 Sanjay Swamy

Game. Absolutely. I will continue.

00:23:39 Sanjay Swamy

To be super excited about Fintech, right? I mean.

00:23:42 Sanjay Swamy

We've done a lot, we continue to do a lot, but I think there are just as you know, UPI has gotten to, you know, 10-12 billion dollar billion transactions a month now. I think we are seeing more and more of every aspect of the Indian businesses or consumers or their interactions tending to get more and more digitized, and as the digitization happens, that creates the digital exhaust on which you know, yes, everybody says, you know, every business is a lending business. It sounds kind of cliche, but there is still such an opportunity.

00:24:19 Sanjay Swamy

I've always maintained, you know, the Indian consumer is unbanked, underbanked or poorly banked. And I think now we're seeing opportunities to serve them right. And as we have seen with some of the investments we made this year, whether it was at Navadhan or Punch in the investment space.

 

00:24:36 Sanjay Swamy

I think these are opportunities that just continue to, you know, as I say Akshay Patra, right, give that it keeps on giving. And so we I think that's one area I'm still super excited about some of our companies this year and maybe we can talk about one or two more.

00:24:56 Sanjay Swamy

Outside of Fintech also right companies like those in the healthcare space. You know it, it is extraordinary to see a company go at the start of the year from being seen as something which was a concept that people could pilot first and then see if it worked for them to get all the way to the mainstream. 

00:25:16 Sanjay Swamy

What has also been very exciting for me, if I look back at the year is examples like this, where the company went from little more than the proven concept and and validated concept all the way through to where the customer says, OK, I just need to have this, you know, 100% of my beds in, in a hospital or something like that.

00:25:33 Sanjay Swamy

So maybe you can talk about companies, whether it's in our portfolio or elsewhere that really made some, you know, quantum leaps in 2023, right? What one company and what got you really excited about seeing how it progressed?

00:25:48 Shripati Acharya

Yeah, maybe I'll make a comment on the themes you're talking about.

00:25:53 Shripati Acharya

I feel that it's really about digitization of India, isn't it? And we are seeing that every transaction which used to be on cash has become digitized and is now available for access to be analyzed to be built upon to get intelligence from and it fundamentally solves the underlying problem in India. I think India is a country of entrepreneurs. We don't have a social safety net. You have to look after yourself.

Right. We are fundamentally a country which values education immensely. Every single person here would want their child to be educated better than they are and so I feel that all of these interactions which we have are getting digitized and when they get digitized and they get captured, I think an enormous opportunity gets unleashed and that's a really massive opportunity..

00:26:49 Shripati Acharya

So coming to your question about whether you know a portfolio company that I'm excited about.

00:26:57 Shripati Acharya

I would like to, you know, pick one which is Zuper. So this is a SaaS company creating the next generation of field service management.

 

00:27:09 Shripati Acharya

And a solution for that which really creates an experience like for field service management that you'd get. For example, if you ordered an Uber. So field service management just to take a step back occurs when you suppose you want to fix your AC at home or in a commercial place.

00:27:27 Shripati Acharya

There is a business which sends somebody to go and fix it, or it could be for landscaping or it could be for cable and fixing any number of any number of things.

00:27:37 Shripati Acharya

In all of these cases, the process has been very manual. It's been a series of back and forth phone calls, but imagine if that entire experience really consisted of placing a request. The person getting dispatched, you're able to observe when that person is coming.

00:27:51 Shripati Acharya

Completing the entire transaction, finishing it entirely digitally, including payments and receipts, along with photographs and everything else. So that is the vision of Zuper, and it's been a terrific story and they're delighted to say they just announced a very substantial fund raise over a $30M round and we think that it's going to be a leader in its space.

00:28:12 Sanjay Swamy

That's amazing, right? In fact, it's also interesting across the board. We've been seeing good companies continue to raise, right? So everybody talks about funding winter and what have you, but whether it's in our portfolio or elsewhere, we've seen some in the massive rounds being announced. So it definitely feels like for the right companies that are building businesses the right way. You know, at the end of the muscles that Amit was talking about at the start of this episode, that there is money to be had and there is good quality funding to be had. Amit, why don't you tell us about a company that's exciting you.

00:28:42 Amit Somani

Actually, I'll make a comment before and I have a question for you, maybe I'll end with that, which is you know the 7 billion dollars that was raised this year, which is set down 70%. Why?

00:28:51 Amit Somani

None of the monster rounds of the 500 million here, 300 million there, etc happened. So I think a lot of funding is happening at the seed level and the Series A level, I think it's beyond series B&C where you know some of the more challenges on the growth stage funding are happening. So I think innovation is sort of alive and well and a lot of interesting things are happening.

00:29:11 Amit Somani

So the company I would pick is Digii which used to be formally CollPoll which is again in the digitization of India theme that Shripati talked about.

 

00:29:22 Amit Somani

There are some 40, 45,000 universities, colleges, institutions that are responsible for, you know, teaching kids right, whether it's for undergraduate, graduate, different curriculums, etc. So Digii helps them digitize their entire operations. Could be the academics, could be the administration, could be student engagement, the whole 9 yards.

00:29:42 Amit Somani

And this is a company we backed a couple of years ago and this year I think was like a really interesting sort of milestone year for the company in that you know what used to be longer sales cycles, founder is involved in the sale sector now becoming much faster and and lots and lots of colleges and institutions are coming in.

00:30:00 Amit Somani

When they wanted to digitize this and when we were backing this a couple of years ago, we're wondering will people pay? How will they pay, etcetera, etcetera. So I think this will happen in many other areas, this notion of digitization and using technology to become both productive you know, effective, efficient etcetera. So that is one.

00:30:21 Amit Somani

One company that really sounds, you know, seemed exciting this year. The question I have for you Sanjay and of course you can also answer the company question.

00:30:30 Amit Somani

You know we did a couple this year, one which is not announced here and is everything in Fintech going to lending? Like what's up with sort of lending even in all fintech there's so much innovation, right and we have a pretty rich portfolio of fintech ourselves. So love to hear your thoughts on that and any company that you want to talk about? So yeah, so.

00:30:50 Sanjay Swamy

Before I get into answering your question on the company front, I think for me the extraordinary company that had an extraordinary year is Dozee, which sort of sounds similar. So we have Zuper, Digii, Dozee, all 5 letter words are maybe the theme for this year.

23 is, you know 3 + 2 is 5! And what happened there is hospitals realize that there is a shortage of nurses and through, you know, put a sensor under the mattress.

00:31:22 Sanjay Swamy

They're able to, in one of their breakthroughs this year, was getting FDA approved and that hopefully will lead to big opportunities in the future as well worldwide. But just in India, I think you know it started being seen as something.

00:31:35 Sanjay Swamy

That is not an experiment anymore, not a pilot anymore, but mainstream. And we've had big hospitals like the Apollo chain using it, and you have said that in the first 200 days they went to zero code Blues. Right now it's a pretty scary thought, but it's amazing if this is something that can even substantially reduce the code Blues. Right? So I think.

00:31:57 Sanjay Swamy

This is a great example of an IoT company using data science having clinical studies using AI.

00:32:05 Sanjay Swamy

And you know, providing literally the amalgamation of everything we talk about right to deliver real value to something that every human being will someday probably experience, right? Hopefully not too soon, but at some point, right, so that I think it has been one of the really exciting things and of course along the way.

00:32:26 Sanjay Swamy

Seeing how a company grows, how the team evolves, how the team grows, how the company starts tracking different metrics, yes, dissipated. And I had a brainstorming session with them in terms of.

00:32:35 Sanjay Swamy

Going from here to the next stage, what should the company be tracking? And so on, so that I think is one of the more exciting things off the journey that we all get to experience. But it's really been a great year for several of our portfolio companies that have had multiple term sheet situations and you know raised rounds of capital that have gone to the next stage. So overall I would say, you know, very satisfying.

00:32:56 Sanjay Swamy

Here on the specific answer of what is everything in Fintech, I would say given that payments in India by itself is not going to have a lot of money in it because with with UPI and things like that, the movement of the money has become pretty commoditized and that's why we're seeing this exponential adoption.

00:33:16 Sanjay Swamy

There will be business models around that where the moment everything is digitized. For most companies, digital payments used to be 2% of their business. Now it's getting to the point where cash is, you know, hopefully going to be 2% of their business. In some cases I haven't been to an ATM in 6 years.

00:33:31 Sanjay Swamy

Because I just don't use cash. So I think the moment your business is completely digital then you know you need to, you have a lot of automation and tools and this is where a lot of the AI based tools and stuff will come. So I think there is still a lot to see. We had backed Recko to do transaction reconciliation.

00:33:51 Sanjay Swamy

Of course they had a great exit to Stripe 18 months ago, but I think that same problem and you know second order problems around

00:34:00 Sanjay Swamy

Business opportunities will, will, will, will have a lot of software plays. They might call them SaaS, but they might be fintech-SaaS. So that part I think is still unsolved. There's a lot of infrastructure, we have Knight fintech in our portfolio that's really killing it by providing lending infrastructure to the incumbents, whether it's the banks or the NBFCs for co-lending. So that's another category.

00:34:22 Sanjay Swamy

I think there's going to be a complete revamp of banking infrastructure opportunities.

00:34:28 Sanjay Swamy

In terms of the direct customer business models, yes, lending seems to be the most attractive one. But there again we are seeing you know whether we're seeing Auto doing in a secured lending for you know, 2 Wheeler loans, whether we're seeing Friyo or which used to be money tap doing consumer lending unsecured. Whether we are seeing you know.

00:34:47 Sanjay Swamy

Of than doing unsecured business lending FinAGG doing you know we ourselves have a pretty rich portfolio. But I think each of these use cases has suddenly become large, large enough opportunity right. So I think you'll see several companies that will have.

00:35:02 Sanjay Swamy

That can grow from zero to 100 million in maybe 4 years, which will get them to IPO scale and that's why I think Fintech is going to continue to be a thing. And if you look at the public markets in India, 35% of our market cap is banking banks and NBFC 's. So it's going to be reflective of the opportunity in the private sector. 

00:35:24 Sanjay Swamy

It's the Christmas season, so we had some Christmas cards here for everyone, but there's a question at the back of each of those. So maybe Amit, you can do the honors and pick the first card, right?

00:35:33 Amit Somani

Sure, I got a new one.

00:35:36 Amit Somani

So good to be in this position. Sanjay, you're enjoying this, right? Why? Why are some well funded startups failing or, you know, shutting down?

00:35:41 Sanjay Swamy

I hijacked the seat.

00:35:48 Sanjay Swamy

Yeah, I think you know, timing plays a very big role and where you start and the habits you inculcate as a young company, this is true I guess with human beings also sometimes are hard to shake off right now.

00:36:04 Sanjay Swamy

In some ways, you are nice to always be told. In fact, when we raised our first fund, our largest LP, said ‘good companies never die of starvation, but they could die of indigestion’. Unfortunately, I think we may have in 2021, you know, given a lot of money to a lot of companies, some of whom were probably just not capable of handling it.

00:36:25 Sanjay Swamy

And so on. The. From the outside, it looks like these are very well funded companies, but they had gotten into a way of operations where they were just burning a lot of cash, perhaps very inefficient.

00:36:36 Sanjay Swamy

Currently, and unfortunately in 2023, as the market sort of did a lot of clean up, these companies were unable to get their act together, right? We've seen a lot of companies actually get their act together who raised a lot of capital and then realized the market was turning and changed their ways. And that's probably the majority. But there are a few exceptions, unfortunately.

00:36:57 Sanjay Swamy

That will be victims of, you know, just having had a very easy early days.

00:37:02 Shripati Acharya

I think fundamentally one needs to understand that it is the customers who decide product market fit not investors.

00:37:11 Shripati Acharya

You can't just fund a company to product market fit, it just has to find that and in the cases where the companies got prematurely funded and still have to stumble and find a way. And if you haven't, then the high burn rate just puts them in a difficult situation.

00:37:26 Amit Somani

So a related question for both of you is not on the card which is.

00:37:32 Amit Somani

You know, start with Shripati. It's not just the amount of funding, but also the valuation. So in many cases, companies raised a lot of money at a valuation that perhaps was a little ahead of the time.

00:37:45 Amit Somani

Does that also play into the company shutting down because then it tries to do unnatural growth or tries to justify that valuation, which was perhaps a bit premature.

00:37:54 Shripati Acharya

Yeah, I think it's a toxic thing. I don't blame the entrepreneurs, because if you're actually saying, hey, look, you know, the company was, let's say, fairly valued at 50, somebody comes and gives the valuation of 150. If you wanna take it. The challenge is that with 150 comes an expectation.

00:38:11 Shripati Acharya

That you are actually going to grow into it in a very short period of time, because that's what the investor implicitly is believing. It might not be explicit in the term sheet, which is given to you when it becomes explicit in the first board meeting, right. And that's when actually the challenger happens. And so now you have a very significant investor on the board who has led your last round asking you to grow 2 to 3x while you're still looking for PMF. The customers aren't there yet.

00:38:41 Shripati Acharya

And it just leads to wasteful, inefficient spending.

00:38:45 Shripati Acharya

And that is just a very bad situation for a founder to be in.

00:38:49 Shripati Acharya

And after that, if follow on funding is unavailable, you're just, you know, left to hand.

00:38:55 Amit Somani

Shall we pick another question? Sure. Shripati, do the honors.

00:38:58 Shripati Acharya

So what is the one thing that you would like startups to focus on in 2024?

00:39:06 Amit Somani

Yeah, I would say Shripati that a lot of focus on governance and doing the basics, right, right, we're all as founders as we see is very exciting.

00:39:15 Amit Somani

About ARR, business revenue growth, CAC brand etcetera. But I think getting the basics right in terms of governance and whether it's board meetings, whether it's MISs, whether it's your, you know, compliance, whether it's your internal audits, all of these things we had a few harsh stories come out in 2023 and even 2022.

00:39:36 Amit Somani

I wouldn't take that lightly. I think that is, you know, the price to pay for building a large sustainable company. So I would definitely say have a big focus area in terms of governance.

00:39:47 Sanjay Swamy

So as usual, I'm going to answer it with 2 answers. Well, there's the fintech world where I think, you know, we've actually had a regulator that finally has recognized Fintechs, that has a digital lending guidelines where fintechs.

And you can put up 5% for FLDG and stuff like that, and there's a lot of talk about fintechs by the regulator. 

 

00:40:13 Sanjay Swamy

While we have always backed companies with the mindset that there's no concept of a grey area in fintech and if it's not white, it's black. I think founders and entrepreneurs have always looked at it and say if it is not prevented, it's probably OK and I think Fintech founders have to have the mindset that if it is not explicitly OK, it is not OK, right? And the regulator I think has got a certain intent of, you know, problems they want to solve.

00:40:42 Sanjay Swamy

You know the priority sector lending, for example, is a big problem here in India. So I think there are ample opportunities for Fintechs to work in areas that are allowed by the regulator that are important for the country to get from, you know, where we are to a 5 to 10 trillion dollar economy and make sure that you're not taking any chances with regulation.

00:41:03 Sanjay Swamy

Right. So that I think is one very important thing for Fintechs for sure. And at a macro level across the ecosystem.

00:41:11 Sanjay Swamy

I think this slump in 22 and then the recovery that we're now seeing in 23 has got a lot of us to realize that the public markets are likely to be the most practical and viable and realistic exit opportunities for companies, right? So all companies at some point, whether it's for the founders or for the investors, need to have some liquidity options.

00:41:38 Sanjay Swamy

And we kind of in this first decade of the Indian startup ecosystem said, let's good things will happen. Let's just keep going and going and going now. Actually it's very clear that yes, you might get lucky. Some companies might be extraordinary and might become, you know, unicorns and multi-corns and Decacorns cons. But there is a predictable way for us to get to an exit opportunity.

00:41:57 Sanjay Swamy

And we've had traction in our portfolio as low as a younger company as it is at $10M has gone IPO and has sustained its IPO price. But realistically I think they're seeing a lot of companies now having the opportunity and with the mindset of saying that the moment I get to $30M, $50M of revenue and I'm growing 50-70% year over year. And I'm profitable. I should be able to list in the public market and the public markets in India are very, very good places to to list on because they're rewarding such companies. So I think I would urge all founders right away, certainly starting 2024.

At the moment you're starting to have product market fit to start building your business as if you're going to list it may happen in 2 years. It may happen in 5 years, but I think those habits are best inculcated early and you keep to some extent the point on governance that Amit was talking about, compliance with regulations, all of these as well as just be ready.

 

00:42:57 Sanjay Swamy

The moment you hit critical mass to have the option to go public, that doesn't mean that you have to go public, but you should be there. And I think in India, realistically any company with 500 crores of revenue which is like $60M and maybe 20% of EBITDA should have a very strong listing in the public markets. So that would be my key input to founders.

00:43:19 Amit Somani

Shripati, do you have any that you would want to recommend something that they should do as they go into next year?

00:43:24 Sanjay Swamy

Come to Prime for funding.

00:43:26 Shripati Acharya

Of course, I think maybe the one line takeaway is.

00:43:29 Shripati Acharya

Be in charge of your own Destiny and that means managing your cash flows, managing your funding environment. Managing you know how we have gotten and when you have gotten the PMF and so forth and be very careful about your dependence on a certain time in which you need to get funded because that will continue to be somewhat hard to predict.

00:43:50 Amit Somani

Awesome. With that, we will try to wrap this episode and 2023 here. We have some exciting news. We had a new gentleman, Jerome, join us as the head of Community at Prime in 2023. So our podcast is back and back with a bang! We look forward to getting back on the circuit early in 2024 before we do that. Sanjay, Shripathi, you want to have maybe one reflection on 2023 of your personal takeaway or your own journey, something that was exciting to you at a personal level while we wrap up and?

00:44:23 Sanjay Swamy

Yeah, I think you know every year I keep saying this, but we genuinely mean it.

00:44:28 Sanjay Swamy

India is just getting more and more exciting to be an entrepreneur and we are super excited to be backing and working with several of these entrepreneurs here and I think it's just going to get bigger and better, right? The best is absolutely yet to come

00:44:43 Shripati Acharya

Absolutely. I couldn't have put that better. Sanjay. I think India is an exciting investment destination.

00:44:50 Shripati Acharya

Got underscored last year and we really expect that to continue going forward and I feel that for investors, I think we are just in a terrific time. Fantastic, gentlemen. Thank you so much and thanks for tuning into the Prime Venture Partners Podcast.

00:45:13 

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